<Page>
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Set forth below is a transcript of the conference call held by
Mohawk Industries, Inc. ("Mohawk") and Dal-Tile International Inc.
("Dal-Tile") on November 20, 2001.
#####
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MOHAWK INDUSTRIES
LEADER, JEFF LORBERBAUM
ID# 2477300
11/20/01
DATE OF TRANSCRIPTION: NOVEMBER 21, 2001
================================================================================
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MOHAWK INDUSTRIES
ID# 2477300 PAGE 2
Operator: Good afternoon. My name is Heather and I will be your
conference facilitator today. At this time, I would like to
welcome everyone to the Mohawk Industries/Dal-Tile
International Management Conference Call. All lines have
been placed on mute to prevent any background noise. After
the speaker's remarks, there will be a question and answer
period. If you would like to ask a question during this
time, simply press star (*), then the number 1 on your
telephone keypad and questions will be taken in the order
that they are received. If you would like to withdraw your
question, press star (*), then the number 2 on your
telephone keypad. Thank you, Mr. Solls, you may begin your
conference.
Mr. Solls: Thank you. Good morning. I'm very pleased to welcome you to
our call today announcing the merger of Mohawk Industries
and Dal-Tile International. My name is Mark Solls, Dal-
Tile's Vice-President and General Counsel. Joining me today
is Jeff Lorberbaum, President and CEO of Mohawk, and Jack
Sardas, President and CEO of Dal-Tile. Also joining me is
John Swift, Mohawk's Vice-President of Finance, Chris
Wellborn, Dal-Tile's Executive Vice-President and Chief
Financial Officer. Before we start, I would like to read a
safe harbor statement under the Private Securities
Litigation Reform Act of 1995 which states, certain of the
statements in this conference call, particularly those
anticipating future financial performance, business
prospects, growth and operating strategies, new products and
similar matters constitute forward-looking statements. For
those statements, Mohawk and Dal-Tile claim the protection
of the safe harbor for forward-looking statements contained
in the Private Securities Litigation Reform Act of 1995. The
forward-looking statements are not guarantees of the future
performance of the companies and actual results may vary
materially from the results and expectations discussed.
These statements are based largely on the companies'
expectations and are subject to a number of risks,
uncertainties and other factors that could cause actual
results to differ materially from those expressed in the
forward-looking statements. Such factors include, among
other things, the fact that the transaction may not be
completed, the impact of competitive pressure and changing
economic conditions on the company's business and its
attendance on residential and commercial activity, reliance
on third-party suppliers, increases in prices of raw
materials and
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energy, currency fluctuations, and other factors relating
to the companies' manufacturing operations and the risk
factors or uncertainties listed from time to time in the
companies' filings with the Securities and Exchange
Commission and other public reports.
Now, I will turn the call over to Jeff Lorberbaum for some
brief comments. Jeff?
Mr. Lorberbaum: I'm excited to announce the merger of Mohawk and Dal-Tile.
This is the next step in the evolution of the flooring
industry as various product categories consolidate to bring
greater value to the marketplace. The combined companies
will be a leading source in the flooring industry. This
merger brings together the best of both the carpet and
ceramic tile industries. Each has a major position with low
cost manufacturing and provides value-added distribution to
our customers. In each market, Mohawk and Dal-Tile have
sufficient share to maintain their competitive advantages,
however changes occur in the future. Both companies are
extremely profitable and have had extraordinary results in
these uncertain economic times. Since both companies are
performing exceptionally well, there will not be any major
shifts in the basic strategies of either company. The
management team of Dal-Tile has done a remarkable job in
developing a highly professional organization and
restructuring the company in the last few years. We will
maintain the present Dal-Tile management and strategy as we
move ahead. I look forward to bringing the Mohawk and Dal-
Tile managements together. I'm confident they will leverage
the strengths and philosophies of both companies to maximize
Mohawk's value to all our customers. Potential synergies
between the two companies are many. Our expectation is to
develop operating strategies over the first 4-6 months and
implement them during the second half of 2002. This should
ensure that we add the most value to our customers and
investors without losing the momentum that the two companies
have achieved today. We believe most of the synergies will
be impacting in 2003 when the economy should be back in an
expansion mode.
I will attempt to highlight some of the larger synergies we
expect to accomplish. The largest opportunity is in
leveraging the relationships of both our hard and soft
surface companies. Our
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products sell through the same distribution channels and
most customers purchase both product categories. These
include the specified commercial channel with designers,
contractors and end-users. The non-specified commercial
channel where specialized distribution does exist in some
areas, the residential new construction with both national
and local builders, the residential replacement market,
which is a growth area for Dal-Tile and Mohawk's strengths;
the big box retailer and finally, distributors which we may
or may not have in common with each other. Maximizing each
of these with a proper sales structure, marketing, product
and brands will be the highest priority. We expect to
increase our market share in both carpet and tile as well
as add credibility and sales to our vinyl, wood and laminate
categories. Dal-Tile's Mexican manufacturing and marketing
also offers opportunities to increase the sales of other
Mohawk products. In addition, manufacturing of other soft
surface products in Mexico may be a viable strategy. The
Mohawk and Dal-Tile logistics and distribution systems are
the best in their categories. Dal-Tile has about 220
service centers supported by 3 regional warehouses. Mohawk
has about 50 satellites supported by 8 regional warehouses.
By maximizing these, we should improve the service levels
and reduce the costs of moving all product. Dal-Tile's
expertise should also enhance Mohawk's ability to service
the other hard surface categories. Mohawk's local delivery
and long-haul trucking system will be expanded to meet the
needs of the entire business. This will reduce both time
and cost of transporting all products to our customers.
The manufacturing systems and procedures of Mohawk and Dal-
Tile are excellent. We anticipate adding best practices to
improve both. Mohawk's message to achieve sudden service
and high inventory turn should provide added value to Dal-
Tile. Dal-Tile's message of institutionalizing goals from
the top floor should add significantly to Mohawk's
infrastructure. Other areas of opportunity include reducing
the combined administrative costs, leveraging the Mohawk
and Karastan consumer brand names, combining import
purchases, offering broader ceramic styling to the retail
market, and reduction of the total SKU's in the system. The
opportunities are enormous. Without considering any
synergies, the combined results of Mohawk in 2002 will be
accretive based on the present projection of the analysts
of both companies. In addition, the high
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cash flow generated by the merged businesses will allow us
to pay the debt down rapidly. The combination strategically
provides a foundation to continue to expand and grow the
Mohawk and Dal-Tile businesses profitably and become a
total flooring company. Jack?
Mr. Sardas: I am also very excited about the proposed merger. It
represents the ideal culmination of our efforts and the
dedication of all our employees as well as the support we
received from our stockholders, customers, lenders and
suppliers. The new organization will have the opportunity to
access new and higher business horizons which should provide
an opportunity to expand sales growth and improve earnings
and cash flow. We are looking forward to the proposed
merger and to becoming part of the Mohawk family. We are
impressed by Mohawk's strong financial performance, their
business acumen, leadership and professional management.
The proposed merger will benefit Mohawk's and Dal-Tile's
stockholders, customers, and employees.
Now, we are open for questions.
Mr. Solls: Operator, would you open -
Operator: At this time, I would like to remind everyone, if you would
like to ask a question, press star (*), then the number 1 on
your telephone keypad. If you are on a speakerphone, please
pick up the handset before asking your question.
Your first question comes from Sam [INAUDIBLE].
Sam: Good morning, gentlemen. I have three quick questions. You
mentioned you believe synergies will begin to happen in,
perhaps, '03. It's very difficult to do this, I know, right
now, but can you quantify for us, or attempt to quantify for
us the estimated synergies in terms of maybe a broad dollar
range?
Mr. Lorberbaum: Well, Sam, I'll tell you at this point we've been doing
financial, environmental, legal, due diligence and getting
ready - we've got the financing in place. We really have not
spent time in quantifying those synergies. But we will be
over the next couple of
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months. So at this point we really do not have numbers for
you.
Sam: Okay.
Operator: Your next question comes from Chris Windham [PHONETIC] with
Goldman Sachs.
Mr. Windham: Thank you, and good morning, and congratulations to
everybody. Just a little bit on kind of the terms of the
transaction. About 15 million shares of stock that Mohawk
will be issuing and about $680 million dollars of debt, is
that right?
Mr. Lorberbaum: That's about right.
Mr. Windham: And what type of terms do you think you can get on that
debt?
Mr. Lorberbaum: That's what we're working on currently. We're going for - we
have a bridge loan right now, Chris, to take us into getting
public debt, and we'll be working on getting the best deal
we can for the public market.
Mr. Windham: And the debt that you're assuming from Dal-Tile, is there an
opportunity to re-finance that and get a better rate on that
debt?
Mr. Lorberbaum: We are not assuming any debt from Dal-Tile. That will all be
extinguished at the closing.
Mr. Windham: Okay. In terms of a tax rate for the combined company, is
there any opportunity to work down the overall tax rate?
Mr. Swift: Well, we're looking at it being in the 37 to 37 1/2% range,
somewhere in there.
Mr. Windham: Okay, and I guess Goodwill is less important to us now with
the FASB change, but what do you anticipate the Goodwill in
the deal being?
Mr. Swift: A mere billion dollars is all it will be, somewhere around
there.
Mr. Windham: Okay, that's all I have, thank you.
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Mr. Lorberbaum: You're welcome.
Operator: Your next question comes from John Vow [PHONETIC] with
Wachovia.
Mr. Vow: Well, that was close. Good morning and congratulations. Can
you discuss at all the management contracts that the Dal-
Tile people - and I'm not asking about dollar amounts. I'm
interested in the structure and length of time, you know,
when we expect - how long those guys are locked in.
Mr. Lorberbaum: You want to talk about it?
Mr. Solls: Yeah, the management contract; there are two employment
agreements. Jack and Chris have employment agreements and
then the senior officers have change of control agreements
and those change of control agreements range from -- in
payment from - three years for Jack and Chris to 2 1/2 years
for the top executive officers. But that's only in the event
of not only change of control but significant change in -
when people leaving the company effectively and changing
their jobs - significant change in jobs.
Mr. Lorberbaum: There's a double trigger on it, John, is what he's saying.
Mr. Vow: Okay, and is there any kind of earn-out incentive for the
Dal-Tile management that's either been structured or being
structured?
Mr. Lorberbaum: No.
Mr. Vow: Okay, and timing - best guess?
Mr. Lorberbaum: We're shooting for early in the first quarter but it may go
into the middle of the first quarter. We're definitely going
to shoot to get it done in the first quarter.
Mr. Vow: And - so I understand you correctly - the opportunities that
Mohawk sees in Mexico are to both sell all of Mohawk's
products into that market where you're not very strong right
now and/or perhaps manufacture some Mohawk home products but
likely not
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tuft carpet. Is that right?
Mr. Lorberbaum: That's correct, but the distribution -- they do have limited
distribution in Mexico and we will look at what we could add
to it, but it doesn't look like it's going to be a large
number in the short run.
Mr. Vow: Thanks for letting us ask questions.
Operator: Your next question comes from Dennis Rosenberg with CSFB.
Mr. Rosenberg: Hi, guys, congratulations. It seems to me that there is a
big opportunity in the relative strengths of your two
businesses in terms of distribution in that Mohawk is strong
in residential replacement, which is a small part of Dal-
Tile's business and they're strong in new construction,
which is a small part of Mohawk's business, so could you
discuss in a little bit more detail how you plan to increase
each of those respective positions?
Mr. Lorberbaum: We haven't worked out the details. We believe that as you
describe, we each have strengths, we each have customers
that like doing business with us. We believe our
distribution systems can be leveraged to bring higher
service levels to both products for the customers and we
believe that if we have the right coordination between the
sales and marketing groups, which we'll have to develop over
the next few months, that those will open doors to us in
both categories. In addition, which you didn't ask the same
thing in the specified commercial business - where we have
relationships on both sides and we believe that we can make
it easier for customers to do business with us.
Mr. Rosenberg: Okay, and the second question - given the size of this
acquisition, would this preclude you making another decent
size acquisition in the carpet industry over the next 6
months to a year?
Mr. Lorberbaum: It will definitely limit what we can do. We have a very high
cash flow which, I'm sure you know and the debt should come
down dramatically very quickly.
Mr. Swift: Yes, it will limit it, Dennis, you're right.
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Mr. Rosenberg: Okay, thank you.
Operator: Your next question comes from Joe Scirocca [PHONETIC] with
Merrill Lynch.
Mr. Scirocca: Hello, everyone, and congratulations all around. I apologize
that I'm not as familiar with Mohawk. My question actually
does pertain towards Dal-Tile. Would you envision, you know,
paring back some of the growth programs you had in place in
the interim here? I know you were looking to expand in wall
tile, natural stone and you have the plant going in
Oklahoma, would there be any consideration to maybe delay or
ratchet back that spending a little bit?
Mr. Sardas: I think - this is Jack - on the contrary. I think the merger
as we said was, if approved, will be a great deal for both
of us and if anything, the prospects really will be even
greater than what we had before because of the kind of
synergies that apparently, and from our own, you know,
looking at the chart and understanding in both our
businesses, we think we have excellent opportunities for
growth.
Mr. Scirocca: Okay, the second question, thinking about this in a broader
flooring industry or flooring category, do you have any
sense where the combined company would fall out on a market
share basis?
Mr. Lorberbaum: Yeah, it should be somewhere in the 20% of the total
flooring industry.
Mr. Scirocca: 20% of the total flooring industry?
Mr. Lorberbaum: Yeah.
Mr. Scirocca: Okay. Excellent, gentlemen, thank you.
Operator: Your next question comes from Shane McGrath with A.G.
Edwards.
Mr. McGrath: Hi, guys. I'm wondering if you can talk about what you do
with
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Dal-Tile's retail operations going forward?
Mr. Lorberbaum: We don't have any retail operations. Dal-Tile has service
centers around the country that they use to deliver product
to the customers and they do not sell to retail consumers.
Mr. McGrath: There are not independent dealers?
Mr. Lorberbaum: No.
Mr. McGrath: Okay.
Mr. Sardas: Our service centers sell to floor dealers, but we do not
sell to the consumer.
Mr. McGrath: Okay, and can you talk about what effect this might have on
your agreement with Congolium distribution there, if any?
Mr. Lorberbaum: I think it should enhance our distribution of Congolium's
product and I think it adds value to our whole hard surface
direction and I think we'll be able to utilize it to
increase our whole hard surface business that we have set in
motion last year and we are on track to grow as we have told
you previously, and this should speed it up.
Mr. McGrath: Okay, and one final question for Dal-Tile. We don't cover
you guys. The $1.42 consensus on First Call does that
include Goodwill amortization benefit for 2002?
Mr. Wellborn: For the most part, there's actually a mixture in there right
now. But most of them include the benefit of Goodwill. But I
think if you look at the average you'll get to about
somewhere in the $1.45 to $1.46 in there.
Mr. McGrath: Okay, thank you.
Operator: Your next question comes from Ding Chung [PHONETIC] with
Ferrelon [PHONETIC] Capital.
Mr. Chung: Hi, good morning - actually, good afternoon. Want to clarify
two things - number one, regarding to - I'm not very
familiar with
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Mohawk's business - in regard to Mohawk's tile business, is
it reasonable to assume you have around less than
15 million dollars in revenue; and secondly, in terms of
the exchange ratio, I guess, right now, the stock is way
above $36.45. Is there a price, you know, of which that Dal-
Tile has a right to walk away from the transaction if
something completely unexpected happens and Mohawk trades to
that level; thank you.
Mr. Lorberbaum: Mohawk has told the Street that in the hard surface we did
about 100 million dollars in all our various categories last
year, that we expect to run at about a 200 million dollar
rate at the end of this year and we don't break it out by
individual product category. Who wants to answer the
walk-away?
Mr. Swift: There is no walk-away provision.
Mr. Chung: Thank you.
Mr. Swift: Either end.
Operator: Your next question comes from Brian Long with Chesapeake
Partners.
Mr. Long: Hi, I was wondering if you could just clarify something on
the financing. I was wondering who was providing the bridge
loan and I also wanted to know if you plan on doing the
public debt offering prior to the closing of the
acquisition?
Mr. Swift: The bridge loan is being provided by Goldman Sachs, Wachovia
and SunTrust and we're planning to get the public debt in
place shortly after the closing of the transaction.
Mr. Long: Okay, and is the transaction subject to financing or is it
100% committed?
Mr. Swift: No, it's 100% committed. We have commitment letters from all
those banks.
Mr. Long: Great, thank you very much.
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Operator: Your next question comes from David Jarrod [PHONETIC] with
Credit Line of Securities.
Mr. Jarrod: Hi, is there a breakup fee involved here?
Mr. Swift: Yes, there is.
Mr. Jarrod: And how much is that?
Mr. Swift: Forty-five million.
Mr. Jarrod: Okay, thank you.
Operator: Your next question comes from Cecil Correll [PHONETIC] with
Home Tech Tile Today.
Ms. Correll: Hi, good afternoon. This question is for Jeffrey Lorberbaum.
I was calling because I'm on the Home Textile side of the
business. I was wondering, I know you guys acquired Crown
Crafts last year and that poised you guys to get about
600 million dollars in Home Fashions for this year. I was
wondering does this merger de-emphasize Home Textiles now?
It would have been 25% of the business but next year, I'm
assuming it's going to occupy a much smaller chunk of it
with this acquisition.
Mr. Lorberbaum: We have different segments of our business that are aimed at
different challenges and we expect to maximize each of them
as we go forward. Each channel - this one sits with our
distribution and marketing channels for our hard surface
flooring business that we've announced we were going into
last year moving forward. It does not reduce our emphasis on
the other opportunities in the marketplace in textiles or
home products.
Ms. Correll: Okay. I know David Kolb was known a lot for growing
his own business so are you going to try to buy
[INAUDIBLE] next year or any other future acquisitions with
any other Home Textiles lines?
Mr. Lorberbaum: We look at each product category based on what options are
available, and if we find the right opportunity we will take
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advantage of them. We really do not have a pre-determined
share of any product line or channel other than trying to
make the most money we can make and adding the most value to
our customers.
Ms. Correll: Okay, thank you very much.
Operator: Your next question comes from Louis Inocco [PHONETIC] with
Floor Covering News.
Mr. Inocco: Yes, gentlemen, I just wanted to know, first off, concerning
sourcing. Will Mohawk and Dal-Tile continue to source tile
from its current partners or will it all be done internally,
number one; and number two, how much in revenue is added to
Mohawk in this transaction, basically how much does Dal-Tile
do in a year?
Mr. Lorberbaum: Let's start with the sourcing. Both Mohawk and Dal-Tile are
importers of ceramic combined with the largest importer of
ceramic in the country and we will continue importing
products and we believe that it will strengthen our
relationships with the suppliers that we have and those that
add more value to us will become larger suppliers as we sell
more product together. On the second question was the -
Mr. Swift: Dal-Tile does about a billion dollars in sales.
Mr. Inocco: Thank you very much.
Operator: Your next question comes from Alex Metviner [PHONETIC] with
[INAUDIBLE].
Mr. Solls: Go ahead.
Mr. Rudman: Hello, this is Gerald Rudman [PHONETIC]. Would you give us a
rough indication as to what the interest expense might be on
the new debt and the term of the debt?
Mr. Swift: Well, that's still to be worked out because we're going to
be going to the public market, but, you know, it should be
somewhere in the 7 1/2 to 8% range, I would think.
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Mr. Rudman: Okay, and previously before the merger you had made certain
plans, or had certain hopes, to achieve revenues in the hard
surface area several years out in the future. Would you say
that those projections in and of itself are intact after the
merger, or do you think that those revenue projections would
have to be reduced because of overlapping business prospects
between the two firms?
Mr. Swift: The number that you're referring to, we said that we had a
goal of hitting 500 million dollars in the hard surface
business; last year we did about 100; this year we expect it
to be at a run rate of about 200 by the end of the year. We
are on track with that and we expect that the two companies
together will be able to grow their business and at least
meet those goals. We expect - to help us grow them more.
Mr. Rudman: But I'm not sure; are you saying that you still have that
500 million goal putting the two companies together, so
that's not reduced?
Mr. Lorberbaum: Correct.
Mr. Rudman: I see. Could you help us understand the distribution costs
of Dal-Tile that was over the road and the potential for
savings that would come from using your vehicles?
Mr. Lorberbaum: Well, we don't have those numbers available. We haven't
gotten into those details with each other and it's going to
take us a period of time to put those in place.
Mr. Rudman: Does Dal disclose the over-the-road expense that they
incurred last year?
Mr. Wellborn: What we disclosed is our transportation expense. It's a
separate line item on the P and L and that's running about
6.6% of sales.
Mr. Rudman: I see. You mentioned dramatic cash flow generation and the
potential to retire the debt in a short period of time.
Could you tell us the hope for term structure of these Notes
that you're going to be selling?
Mr. Swift: We're still going to be working that out, Gerald.
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Mr. Rudman: But is it roughly 2-3 years or 3-4?
Mr. Lorberbaum: No, it will be longer than that, because we're going to have
some short-term debt on the books here that's going to be
coming - expiring over the next couple of years so we'll be
looking out further than that.
Mr. Rudman: But the company separately based on Street estimates for
this year will be generating close to 300 million a year in
free cash flow. Is there any reason why capital expenditures
would have to be increased or you have other cash uses so
that we couldn't see a fast retirement of that debt once the
acquisition is completed?
Mr. Swift: We will be retiring the short-term debt, which we have a
chunk of, over the next couple of years and we're looking at
the proper capital structure for the company in the long
run, and we haven't really decided on exactly which way we
want to go. We're still working with our people -
Mr. Rudman: I understand, you haven't worked these out, but I'm just
trying to -
Mr. Swift: There is significant cash flow to be generated over the next
couple of years and we will be using that cash flow to
retire debt and to look at other business opportunities.
Mr. Rudman: And when do you think you - chronologically - you might be
in a position to help us understand the synergies of the two
independently successful companies combining?
Mr. Lorberbaum: We plan on taking 4-6 months of getting our management
groups together to define them, not to make any staff
decisions since both companies do extremely well and we want
to make sure that we make good decisions and then we want to
implement them properly, so, I mean, it's months away.
Mr. Rudman: I see. But without getting into the detail, could you tell
us those areas where you think the greatest opportunities
lie? I imagine transportation would be one and secondly,
products for these existing customers, but could you outline
it in a little bit more
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detail for us?
Mr. Lorberbaum: The biggest advantage is to leverage the relationships from
the different market channels I talked about earlier and
drag the different sales forces and marketing groups into
each other's customers and find ways of making the
customer's life easier by providing him better products and
services. We believe there is a major opportunity in that
from - in every different business channel that we talked
about. In addition, besides those, you know, through the
things we talked about, maximizing the sales structure, on
marketing, on products and even the brand strategies, we're
going to have to determine what is the best brand strategy
for each market segment. We believe that this will also help
us grow our other hard surface products such as wood,
laminate and vinyl in increasing the customer's confidence
in Mohawk. We talked about potential Mexican manufacturing
for soft goods. You mentioned the delivery system, that's a
piece of it. There's also the logistics and distribution
system that they have 220 service centers, we have 50
satellites. How do we utilize those to maximize the pieces?
What synergies exist in each of those? We have regional
warehouses that we both have inventory in - is there some
method to make those more viable and improve the level with
it. The sales people, coordinating their efforts and
utilizing those things together, the list goes on forever,
as well as taking costs out of all the pieces that we
understand the businesses better and look at synergies
between them.
Mr. Rudman: That's a very complete answer. I appreciate that. My last
question related to the issuance of stock options. Will
there be any revision in the quantity of stock options or
change in the stock options for each of the individual
companies prior to the combination occurring?
Mr. Lorberbaum: There will be no changes in the stock options from where
they are before the end, before this thing concludes.
Mr. Solls: We have a stock option program and we plan to continue with
that, Gerald, for the employees of Dal-Tile.
Mr. Rudman: Do you plan - do you think there will be any accounting
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adjustments that will result in positive Goodwill being
generated in accounting terms?
Mr. Swift: No.
Mr. Rudman: In other words, a markdown of assets that would be amortized
into the income statement?
Mr. Swift: No, I don't think so.
Mr. Rudman: Thank you very much, I appreciate your frank answers and I
wish you continued success.
Mr. Swift: Thank you, Gerald.
Operator: Your next question comes from Chris Windham with Goldman
Sachs.
Mr. Windham: Thanks, just got a couple more follow-up questions. In terms
of kind of pro-forma for the deal, it looks like debt-to-cap
is around 40%, is that right?
Mr. Swift: No, it would be higher than that, around 46, 47%.
Mr. Windham: Okay, can you walk me through that, how we get there?
Mr. Swift: It will be in the proxy that goes out, all the information
will be in there. We're not handing out numbers today.
Mr. Windham: Okay, but I mean, if I take equity, 15 million shares of
stock -
Mr. Swift: Chris, we'll put it in the proxy when it goes out. We're not
going to go through numbers today.
Mr. Windham: Okay. In terms of the cash flow statement, any reason to
change, kind of, depreciation in Cap Ex for the two
companies?
Mr. Swift: It would be a slight change on depreciation. You know, there
may be an up or down on the assets, but it would not be
significant.
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Mr. Windham: Okay, and I guess there is probably some opportunity to
reduce the working cap for the combined company versus two
companies stand-alone?
Mr. Swift: I think that's in the long run. Initially, we're probably
going to be looking at keeping it intact until we can work
out, as Jeff said, over the next 6 months or so, exactly how
we're going to handle the businesses and then, hopefully,
there is some real synergy on working capital.
Mr. Windham: Okay, and when you guys talk about the Mohawk strengths in
the residential replacement channel, are you speaking about
the big box and Mohawk has been very successful, and Dal-
Tile for a variety of reasons hasn't really pursued that
channel. Could you kind of rank that in terms of priority
and how big an opportunity you think is for further
penetration in the big box is for Dal-Tile?
Mr. Lorberbaum: There are two pieces, one is the residential replacement.
There is some 20-something thousand independent retailers
out there and as the consumers change, there are more people
using hard surfaces in those homes that are being updated,
so most of our customers are moving from carpet suppliers to
total flooring suppliers; and we believe we're helping them
and that this merger will help us accomplish that as we go
forward.
Mr. Sardas: This is Jack. This, I think, will also give us an
opportunity to improve various areas at the home centers in
the big boxes, taking advantage of the distribution network
that Mohawk has. We've already heard that some good comments
regarding the specific possibility.
Mr. Windham: Okay, and Jack, for you and Chris, what are the plans now,
how - what role will you have in the combined company?
Mr. Sardas: First of all, as far as I'm concerned, I'm going to stay a
few months here with the group here, with whom I worked
those last 4 or 5 years. We have a fantastic group of people
and I think you know some of them, Chris. We are very proud
of them and this is a great operational management team and
they are really capable of doing a lot of good things. So my
role with that team is mostly coaching
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and motivating. I think that some of you know Jeff by now,
pretty much met Jeff, I don't know if you've met him or not,
but I met Jeff and I found in him an outstanding leader and
I think some of you guys were a little bit concerned about
who will be my successor and I want to tell you that I
found the ideal one. This man is going to be capable to run
the combined company and I saw him talking to people. He's
a motivator, leader and I'm very confident that I'm going to
leave that outstanding group of people in good hands. Now,
all of those good things on the side of Jeff is a lot more
than objective and younger, but I'm better looking than him.
Mr. Windham: Thanks, Jack. I would agree with all of your comments, both
on the quality of the Dal-Tile team and the Mohawk team.
Operator: Your next question comes from Michael Gardner with Wedge
Capital Management.
Mr. Gardner: Good afternoon. Jeff, you spoke about how you're both
importers of ceramic and you'll be even more powerful as a
result. But of course, you are taking on a large fixed base
now. Do you have any concerns about what that lack of
flexibility might mean to you going forward in terms of
sourcing?
Mr. Lorberbaum: We are basically selling up the capacities. We're getting
ready to expand capacities even further as we go forward and
we believe that we're going to expand the business as we go
forward. So we're going to need more supplies for all of
those things.
Mr. Gardner: And you're comfortable that any shift in foreign competition
will not harm that decision in terms of domestic expansion.
Mr. Sardas: We always had competition as you well know. This is on the
part of our group here that we performed well in spite of
the competition. So nobody can tell you today that the
competition will suddenly disappear. As a matter of fact,
the competition really makes us better, but what we are
going to do is continue to import those products that may
complicate our manufacturing and add more complexity so we
try to facilitate and improve our deficiencies in our plans
by using imports; and the more capacity we will be
implementing in this country, the less we will be relying
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on big volumes from imports.
Mr. Gardner: Thank you. I have one other question. It sounds like from
some of your answers, and this is not to be critical, it
sounds like this deal came together rather quickly. What can
you tell us about the process by which you've gone through
in getting to this point?
Mr. Swift: The process is going to be laid out in the proxy in detail
when we send it out; until then, we're not going to be
talking about it.
Mr. Gardner: When do you think that will go out, John?
Mr. Swift: Middle of December.
Operator: Your next question comes from Pamela Wilson from W.L. Ross.
Ms. Wilson: One of my questions has already been answered but I would
certainly like to ask a non-merger related question and that
is, I wonder whether or not the recent bankruptcy of
Burlington presented any - either opportunities or risks to
Mohawk's commercial carpeting business; do you see
yourselves getting market share or alternatively, do you see
any price pressure?
Mr. Lorberbaum: We don't really see it affecting the business significantly.
We have competitors that are in trouble and are not in
trouble all the time. We think that we do business with our
customers because we supply them value and a high service
level and good quality products. We don't like seeing any of
our competitors in trouble, but we try to maximize our share
of the marketplaces in each piece. Depending upon how they
act, it may limit what they can do in the marketplace and
historically, that's had a positive effect rather than a
negative effect.
Ms. Wilson: Thank you.
Operator: Your next question comes from Christian Corea [PHONETIC]
with Lehman Brothers.
Your next question comes from Greg Fluombo [PHONETIC] from
Focus.
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Mr. Fluombo: Hi, gentlemen, congratulations. I guess the biggest question
I've got remaining is, Jacques, your joint venture with Emil
Ceramic, I was just wondering if that was going to be
affected in any way, if time-tables are going to be changed
or what not with that?
Mr. Sardas: No, I don't believe that this will change but - and I don't
see any change even in the timetable, so we are going ahead
with that. We are expecting to have the final arrangements,
especially regarding the factory and there's just another
document that has to be signed. This will be done within the
next few weeks.
Mr. Fluombo: And you're keeping the management team intact at Dal. Does
that mean that Dal is going to be a separate brand or is it
going to be under the Mohawk brand, or how is that going to
work?
Mr. Lorberbaum: How it's going to work is we have just put together a deal
with the best company in the ceramic industry and anybody
who doesn't maintain the management group for the best
company, there's something wrong with, is it. And we will
take that group and we will ride them as long as they can
go.
Mr. Fluombo: Sounds good, well you've got a good team to work with.
Mr. Lorberbaum: We sure do.
Mr. Fluombo: Thanks a lot.
Operator: Your next question comes from Melvin Daumbach [PHONETIC]
with Daumbach Capital
Mr. Daumbach: Good morning, how is everybody today? Wonderful. I have
three questions, do you want them all at once? Okay, I'm
going to give them to you one at a time, then. With respect
to your tile business, can you discuss the overlap as it
relates to Hart, Scott, Rodino [PHONETIC]?
Mr. Swift: The market share - in the ceramic business, we believe we
have somewhere combined in it roughly 25-30% range of the
total ceramic industries so we do not believe that there is
any question
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that it should go through reasonably.
Mr. Sardas: There is one more point, also. Don't forget that there is a
very big market share that is from imports, so the imports
to me, they present a major market share and that's why I
don't expect to have a problem with that area.
Mr. Daumbach: Okay, the second question is, can you give just a brief
time-table of when we might see your preliminary proxy and
when you will be filing for Hart, Scott, Rodino?
Mr. Swift: Yeah, it will be in the middle of December and we're going
to be filing Hart, Scott as soon as we get it ready.
Mr. Daumbach: And do you need any other approvals besides Hart, Scott?
Mr. Swift: Shareholder approval.
Mr. Daumbach: Okay, but no, like, you or anything like that - I'm not
familiar with your company.
Mr. Swift: Hart, Scott will have to be - no there is no - Hart, Scott
in both U.S.A. and Mexico.
Mr. Daumbach: Okay. That's it, thank you.
Mr. Swift: Yep.
Operator: Your next question comes from Ed Nordin [PHONETIC] with
Riverside Asset Management.
Mr. Nordin: Hi, good afternoon, it's Mitch Nordin from Riverside Assets.
Just looking at the press release you mentioned that it's
about 50% in cash and I'm wondering is that cash amount
subject to adjustment or is it $11 no matter what?
Mr. Lorberbaum: No, the $11 is not subject to adjustment.
Mr. Nordin: Okay, and the .2414, plus 11, that applies in the range - if
your average price is between $41 and $50, is that about
right?
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Mr. Swift: That's right, $41 to $50.12.
Mr. Nordin: And it says over - I guess what do you mean when you say
average price? Is it a fixed period prior to closing or
prior to the shareholder meeting.
Mr. Swift: Prior to three days before closing, it says the average of
the last 20 days.
Mr. Nordin: Okay. All right, and the question with regard to - you are
leveraging up a bit here - have you talked to the rating
agencies and what do you anticipate your rating would be?
Mr. Swift: We're going to be talking to him in the next week or so.
Yes, we have not gotten any preliminary discussions on this
going with the rating agencies, mainly because of the
confidential nature of it.
Mr. Nordin: Okay, but your EBITDA coverage, the way I see it, is over 7
times, is that right, EBITDA interest?
Mr. Swift: Yes.
Mr. Nordin: More than adequate. And a question for Jack, just - why is
he selling now. If he can go into it a little bit about why
he decided to enter into the transaction now.
Mr. Sardas: Because I think it's the best thing for our stockholders,
our customers, and our employees.
Mr. Nordin: Terrific, congratulations.
Operator: Your next question comes from Marina Nello with Bloomberg
News.
Ms. Nello: Hi, I just had a brief question. How big of a market is
the hard floor covering market right now and how big of a
share do each of you have in it?
Mr. Lorberbaum: The hard surface business is about 7 billion dollars.
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Mr. Swift: Ceramic is about 2.
Mr. Lorberbaum: Ceramic is about 2 billion of it.
Ms. Nello: Hard surface including both tile and wood?
Mr. Lorberbaum: And laminate and vinyl and rubber.
Ms. Nello: Right.
Mr. Lorberbaum: And everything else that goes on the floor.
Ms. Nello: And how much of a share does Mohawk have in the hard
surface right now?
Mr. Lorberbaum: Prior to the merger?
Ms. Nello: Yes.
Mr. Lorberbaum: Infinitesimal. We have about $150-200 million of a 7 billion
dollar market.
Ms. Nello: One hundred fifty million of a $7 billion?
Mr. Lorberbaum: On hard surface we said will be running at a $200 million
rate at the end of the year.
Ms. Nello: Right, and your sales of the last year were $100 million?
Mr. Lorberbaum: Correct.
Ms. Nello: And you expect to make $200 million this year.
Mr. Lorberbaum: We expect to have a rate of $200 million.
Ms. Nello: A rate?
Mr. Lorberbaum: A rate of, is what we told the Street.
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MOHAWK INDUSTRIES
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Ms. Nello: And how much of - this is my last question, how much comes
into play of this issue of the demand for carpet slowing.
I know your sales of carpet were down a little bit last
quarters. How much does that come into play with this
merger?
Mr. Lorberbaum: The reason for the merger is that the flooring industry has
been changing that the supplier - the retailers used to be
in one marketplace or the other. The retailers are starting
to address all marketplaces that Mohawk as a company had a
distribution system that we felt could be utilized across
the different product categories and add value to our
customers in those product lines. This is the next stage in
the movement, whereas moving from a carpet company to a
total flooring company. We believe long-term the industry is
going to continue to change and there will be several major
players who have crossed the various product lines.
Ms. Nello: You mean there will be further consolidation?
Mr. Lorberbaum: We believe there will be.
Ms. Nello: What? As companies try to become, you know, offer all kinds
of products to their customers?
Mr. Lorberbaum: As they try to offer a total product line to their customer
base.
Ms. Nello: Thank you.
Operator: Your next question comes from Bill Havers [PHONETIC] with
EMT Capital Market.
Mr. Havers: Morning, John. This question is directed more toward Mohawk,
for those of us who aren't as familiar with your business as
with Dal-Tile. Could you briefly characterize the framework
of your distribution system; in other words, I think you
touched on it earlier, the number of major and minor
distribution centers, number of rigs and trailers, anything
else that I'm not thinking of.
Mr. Lorberbaum: Don't hold me to exact numbers. We have basically 8-9 major
inventory warehouses with support of additional
approximately 50, we call them "satellites". They're
connected with local and long
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haul trucking systems. There are around 700 trucks in the
fleet and 1,500-2,000 trailers that we utilize. We
supplement those with carriers where we make agreements to
take a number of loads over certain routes on a consistent
basis in order to supplement that, and how much more detail
would you like?
Mr. Havers: Maybe just the one - that would be the mix of internally
controlled logistics versus outsource - is it 75/25?
Mr. Swift: On the local - I mean almost all of the local deliveries are
on our own trucks and in the long haul, I would guess is in
the 50% range.
Mr. Havers: Okay, perfect; thank you.
Operator: Your next question comes from Christian Corea with Lehman
Brothers.
Mr. Corea: Sorry, I had trouble with my mute button last time, but in
the interim, my question was answered, so thank you.
Operator: Your next question comes from Jonathan Brandt.
Mr. Brandt: Yes, I was curious as to is there any way you fellows might
think about locking in the current attractive interest rates
given that you said you're probably not going to do -
Mr. Swift: Yeah, we're looking at that now, and that's a very valid
point. We're studying that now and deciding on what course
of action we're going to take.
Mr. Brandt: Okay, thanks a lot.
Operator: Your next question comes from Arnold Brief [PHONETIC].
Mr. Brief: It's not clear to me what your intentions are with the
consolidation of your own hard floor business - Mohawk's
hard floor business with Dal-Tile. Do you envision one sales
force; continuation of two separate businesses or are you
consolidating the business under one management? Is the
management of those two companies going to be combined
physically in Georgia or wherever?
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MOHAWK INDUSTRIES
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Mr. Lorberbaum: It's too early to determine exactly how it's going to end
up. I believe what's going to happen, it's going to be
looked at market channel by market channel and there may be
different conclusions in each one. We have specialists in
the ceramic tile business which we don't want to use. We
want to maximize the business so we'll have to look at each
channel and see how to cross-pollinate and utilize them and
what management structure will be utilized to do that and
it's too early to give you an answer.
Mr. Brief: Thank you.
Operator: Your next question comes from [INAUDIBLE].
John: I just want to follow up. It sounds to me like you're going
to continue to source - Mohawk is going to continue to
source ceramic tile. I'm just curious whether there's much
of a differential in price between what Dal-Tile could
produce it for versus what you're buying it for, or if
that's not a valid comparison because maybe they're
different products, different types of products?
Mr. Swift: Dal-Tile is importing several amounts today. It's not
unusual that they continue and I guess I'll let Jack give
you a view of it because he knows it as well as we do.
Mr. Sardas: Well, the first point, there is that you're going to have a
lot of different price levels and there are a lot of product
lines that we are -- our manufacturing cost is very, very
competitive and what we are trying to do as I mentioned
before, we are trying to get some complexity out of our
manufacturing facilities and import them. So, this is, I
think, the kind of an outlook on what you were asking.
John: Is there a synergy, though, between just - right out of the
box just looking at the combined buying power, if you will,
of your sourcing, or the possibility now that some of the
product Mohawk's importing, Dal-Tile can make more
cost-effectively, are there some synergies there. I know you
don't want to quantify them, but are they readily
identifiable?
Mr. Sardas: Well, there is no doubt that the volume gives you a little
bit more
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MOHAWK INDUSTRIES
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leverage with suppliers and we are going to try to use
that, but again, it depends a lot on the growth of the
two companies that combine in the ceramic area of the
business. And if this grows a lot faster, than we can
initially accompany with increased capacity; of course, the
imports will increase. But on the long-term, we will be
equipped to produce all kinds of products at all levels here
in the States. We have already, I think some of you know,
that we have plans to build a state-of-the-art plant in
Muskogee, in Oklahoma, and this is going to be an area where
we can really supply the combined companies with quite a bit
of volume.
John: But maybe Jack I could ask you, when you saw roughly what
Mohawk is paying for the ceramic tile -
Mr. Sardas: We have not looked at that, sir, I'm sorry.
John: You haven't?
Mr. Lorberbaum: No, but John, what we know in our own business, except for
the real commodity end of the business that we get higher
margins on product that we make versus what we buy.
Mr. Sardas: We are a very large importer so we have a very good idea of
what's going on in the import, in the prices and all those
dynamics. For the time being, we did not go into a lot of
detail in what kind of product and at what price Mohawk is
buying or selling at this point in time. While we're to be
doing that after we will be able to sit down and have the
opportunity to define all the added synergies and the areas
where we can do some improvements.
John: Great; thank you very much.
Operator: At this time, there are no further questions.
Mr. Swift: Well, thank you all for joining us on our call. We
appreciate your interest in our company.
Mr. Lorberbaum: Have a nice day.
Operator: This concludes today's call. You may now disconnect.
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[END OF CALL]
#####
The foregoing materials contain "forward-looking statements" within
the meaning of Section 21E of the Securities Exchange Act of 1934 particularly
those statements regarding the effects of the proposed merger, and those
preceded by, followed by or that otherwise include the words "believes,"
"expects," "anticipates," "intends," "estimates," or similar expressions. For
those statements, Dal-Tile claims the protection of the safe harbor for
forward-looking statements contained in the Private Securities Litigation
Reform Act of 1995. Forward-looking statements relating to expectations about
future results or events are based upon information available to Dal-Tile as
of today's date, and the company does not assume any obligations to update any
of these statements. The forward-looking statements are not guarantees of the
future performance of Dal-Tile or the combined company and actual results may
vary materially from the results and expectations discussed. For instance,
while Dal-Tile and Mohawk have entered into a definitive agreement, there is
no assurance that the parties will complete the transaction. In the event the
companies do not receive necessary government or stockholder approvals or fail
to satisfy conditions to closing, the transaction will terminate. Additional
risks and uncertainties related to the proposed merger include, but are not
limited to, conditions in the financial markets relevant to the proposed
merger, the successful integration of Dal-Tile into Mohawk's business, and
each company's ability to compete in the highly competitive floor covering
industry. The revenues and earnings of Dal-Tile and the combined company and
their ability to achieve their planned business objectives will be subject to
a number of factors that make estimates of future operating results uncertain.
These factors include: (1) materially adverse changes in economic conditions
generally in the carpet, rug, ceramic tile and floor covering markets served
by Dal-Tile and Mohawk and the combined company; (2) increased competition
from other carpet, rug, ceramic tile and floor covering manufacturers; (3)
increased raw material prices; (4) the timing and level of capital
expenditures; (5) the successful integration of the companies including the
challenges inherent in diverting Dal-Tile's management attention and resources
from other strategic matters and from operational matters for an extended
period of time; (6) the successful introduction of new products; (7) the
successful rationalization of existing operations; and (8) other risks
identified from time to time in Dal-Tile's and Mohawk's SEC reports and public
announcements.
THE PROPOSED TRANSACTION WILL BE SUBMITTED TO DAL-TILE'S AND MOHAWK'S
STOCKHOLDERS FOR THEIR CONSIDERATION, AND MOHAWK WILL FILE WITH THE SEC A
REGISTRATION STATEMENT CONTAINING THE JOINT PROXY STATEMENT-PROSPECTUS TO BE
USED BY DAL-TILE AND MOHAWK TO SOLICIT THEIR RESPECTIVE STOCKHOLDERS' APPROVAL
OF THE PROPOSED TRANSACTION, AS WELL AS OTHER RELEVANT DOCUMENTS CONCERNING
THE PROPOSED TRANSACTION. YOU ARE URGED TO READ THE REGISTRATION STATEMENT
AND THE JOINT PROXY STATEMENT-PROSPECTUS REGARDING THE PROPOSED TRANSACTION
WHEN THEY BECOME AVAILABLE AND ANY OTHER RELEVANT DOCUMENTS FILED WITH THE
SEC, AS WELL AS ANY AMENDMENTS OR SUPPLEMENTS TO THOSE DOCUMENTS, BECAUSE THEY
WILL CONTAIN IMPORTANT INFORMATION. You will be able to obtain a free copy of
the joint proxy statement-prospectus included in the registration statement,
as well as other filings containing information about Dal-Tile and Mohawk, at
the SEC's Internet site (http://www.sec.gov). Copies of the joint proxy
statement-prospectus and the SEC filings that will be incorporated by
reference in the joint proxy statement-prospectus can also be obtained,
without charge, by directing a request to: Dal-Tile, Mark A. Solls, Dal-Tile
International Inc., P.O. Box 170130, Dallas, Texas 75217 (214-398-1411), or to
Mohawk, Jerry L. Melton, Mohawk Industries, Inc., P.O. Box 12069, Calhoun,
Georgia 30701 (706-629-7721).
DAL-TILE AND ITS DIRECTORS AND EXECUTIVE OFFICERS MAY BE DEEMED TO BE
PARTICIPANTS IN THE SOLICITATION OF PROXIES FROM THE STOCKHOLDERS OF DAL-TILE
IN CONNECTION WITH THE MERGER. ADDITIONAL INFORMATION REGARDING THE INTERESTS
OF THOSE PARTICIPANTS MAY BE OBTAINED BY READING DAL-TILE'S DEFINITIVE PROXY
STATEMENT DATED MARCH 31, 2001 IN CONNECTION WITH DAL-TILE'S ANNUAL MEETING OF
STOCKHOLDERS HELD ON APRIL 26, 2001 AND BY READING THE JOINT PROXY
STATEMENT-PROSPECTUS REGARDING THE PROPOSED TRANSACTION WHEN IT BECOMES
AVAILABLE.