Mohawk Industries, Inc.
- 57 -
Aging U.S. Housing Stock
The age of owner-occupied housing stock has been trending upwards over the last ten years. In 1997,
the median age of the average American home was 29 years, but it crept up to 32 years by 2007. In fact,
according to the latest American Housing Survey, over 50% of the U.S. housing stock is 40 years or older,
which bodes well for future flooring/remodeling expenditures .
U.S. Housing Stock
Year Structure Was Built
Total Housing Units %
of
Total
2005 to 2009
7,324
5.6%
2000 to 2004
9,158
7.0%
1995 to 1999
8,821
6.8%
1990 to 1994
7,060
5.4%
1985 to 1989
8,804
6.8%
1980 to 1984
7,478
5.7%
1975 to 1979
13,731
10.6%
1970 to 1974
11,068
8.5%
1960 to 1969
15,261
11.7%
1950 to 1959
13,222
10.2%
1940 to 1949
7,945
6.1%
1930 to 1939
5,840
4.5%
1920 to 1929
5,164
4.0%
1919 or earlier
9,235 7.1%
130,111
100.0%
Source: American Housing Survey for the United States, 2009
International Growth
Approximately 15%-20% of the Mohawk’s total sales are generated outside of the U.S. Currently, the
Company is focused on the developing countries, in particular, Mexico, Russia and China.
International Growth Opportunities
Sq. Ft. in Millions
2005
2006
2007
2008
2009
China
TILE
33,100
40,400
47,600
54,700
59,200
Russia
LAMINATE
395
409
527
656
592
Mexico
TILE
1,732
1,765
1,861
1,894
1,754
Source: Ceramic World, Frost & Sullivan, China Construction Ceramics Association
and management estimates via Company presentation
The Mexico tile market is equivalent to the U.S. market in terms of market size and unit volume, and
growing 5%-6% per year. The Company’s Dal-Tile business unit has manufactured ceramic tiles in Mexico (at
its Monterrey facility) since 1955, primarily for export to the United States. Sales in the Mexican market was
primarily on the higher end segment of the market and MHK achieved less than a 10% market share of the
entire market. However, the lower end of the segment comprises the largest market segment. Now, Mexico is
one of the focal points of MHK’s growth strategy. To gain a larger share of this market, the Company recently
Mohawk Industries, Inc.
- 58 -
constructed a new plant in Salamanca, near Mexico City, to expand production, broaden the product offerings
to encompass value price points and increase market penetration through distributors. This new plant is
targeted to begin production in mid-2012. According to Lorberbaum,
“The Mexican marketplace this year [2010] grew 3%, it’s anticipated to grow about 6% next
year. So we believe it’s a good market to be in. We have management talent there that
understands how to operate the plants, and understands the customer base. And we will invest
this year [2011], broadening our distribution, and in some cases, selling the products that we
have into the marketplace and they’ll be replaced by new ones when the [new] plant [comes on-
line]….”
4
MHK started distributing tiles to the Russian marketplace during 2008. In 2009, total flooring market in
this country was approximately 4.1 billion square feet, with laminate and hardwood flooring accounting for 9%
and 5%, respectively, of the total market. Russia’s market growth is driven by a rapidly expanding middle class
and rising personal income. Until recently, the Company primarily imported ceramic and laminates into the
Russian market from its European plants. However, importing is difficult as it is not only costly, but it is difficult
to get products across the borders, which negatively impacts customer service levels. In 2009, MHK built a
distribution center in Russia in order to improve customer service and enable it to broaden out its sales base.
In 2010, the Company began construction of a manufacturing plant in the country, which will be partly
operational in 2011. This new facility will be able to support $100 million worth of sales and should be
operational in 3Q 2011. As in Europe, the Company aims to compete in the mid- to high-end with differentiated
products in the Russian laminate market.
The Chinese flooring market is estimated to be approximately 60 billion square feet, or 30 times the
size of the U.S. market, and it is expected to grow 10%-12% per year. The market is highly fragmented with the
largest player having no more than a 3% or 4% market share. Mohawk recently entered the Chinese market
with an $80 million investment for a 34% interest in Sanfi, one of the country’s top ten ceramic tile
manufacturers. This investment not only allows the Company to participate in the world’s largest and fastest
growing tile market, but it also provides MHK with a source of low cost value-added products for the North
American market and a gateway to neighboring Asian markets. According to Lorberbaum,
“We’ve put significant capacity in that marketplace. We are developing the customers,
broadening our distribution. We are, in China, we brought together glazed floor tile technology,
which the first line has already been started up in China. We’re helping them develop products.
We’re helping them improve their merchandising and marketing, and the combination of those
pieces; we believe that we can grow our share, both from an internal standpoint. And then longer-
term, it would give us the base to possibly start consolidating the market over time and put us in a
position to significantly participate in the market over time.”
5
Valuation
At current levels, Mohawk is trading at 7.0x LTM EBITDA, which we believe represents depressed
profitability. Over the last 10 years, TEV/LTM EBITDA ranged between 4.9x and 12.5x, and averaged 8.7x.
Comparable companies in our universe that supply building products to the home construction and remodel
industry are currently trading at ~10.0x LTM EBITDA.
From a strategic acquirer perspective, Berkshire Hathaway acquired Shaw Industries at ~7.0x LTM
EBITDA in 2001. However, we believe margins were more normalized in 2001 than is currently the case. At the
time of Berkshire’s acquisition, Shaw’s had operating profit margin of 9.4%, which was similar to MHK’s
profitability at the same time and much higher than the Company’s operating profit margin of 5.8% in 2010.
Furthermore, the majority of Shaw’s business is carpeting, which has slower growth and a lower operating
profit margin. More recently, in August 2009, private equity group, TPG Capital, acquired a 12% interest in
another of MHK’s competitors, Armstrong World Industries, for about $156 million, implying a valuation of
4
4Q 2010 earnings call transcript
5
Ibid