莫霍克工業集團 (MHK) 2007 Q1 法說會逐字稿

Good morning. At this time, I would like to welcome everyone to the Mohawk Industries first quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. [OPERATOR INSTRUCTIONS] As a reminder, ladies and gentlemen, this conference is being recorded today, Friday, April 20, 2007.

I would now like to introduce Mr. Jeff Lorberbaum, Chairman and CEO. Mr. Lorberbaum, you may begin your conference.

Thank you. Welcome to Mohawk's first quarter conference call. With me I have Frank Boykin, our CFO, who is going to go over the Safe Harbor statement.

I would like to remind everyone that our press release and statements we make on this call may include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995, which are subject to various risks and uncertainties including, but not limited to, those set forth in our press release and our periodic filings with the Securities & Exchange Commission.

Thank you, Frank. Mohawk had a good first quarter given the industry cycle. Net earnings were $90 million and earnings per share was $1.32, both representing a 14% increase over last year. The first quarter earnings include a partially paid Customs refund. Net sales for the period were $1.9 billion, a decrease of 3% as a result of the industry downturn in the U.S. new housing and replacement categories. U.S. housing statistics continue to be weak and are expected to lower demand for floor covering this year. Historically, these downturns create pent-up demand which favorably impact the industry when a cycle ends. The first quarter results were better than we had anticipated and exceeded our own estimate. The U.S. flooring business remains slow. However, comparisons to the prior year will be easier in the second half of 2007 when the industry downturn began. We remind everyone that we have limited forward views of our sales revenues and significant portions of our raw materials. This makes both sales and costs difficult to predict in a volatile market.

The residential business remains challenging in all product categories, reflecting softness in both the new and remodeling business. Commercial continues to outperform the rest of the business and is expected to continue this way throughout the year. In the U.S., all managers are balancing the short-term reductions with a long-term view of a cycle improvement. We're focusing on managing our cost and improving productivity, while maintaining investments in products, marketing and assets which strengthen our future. All businesses are managing inventory levels, expenses and production schedules to adapt to the industry downturn. The European economy maintained its positive trend and continues to have good momentum. The improved economic conditions in Europe enhanced our ability to pass through rising material and energy costs in the market. Given our good results, we continue to generate strong cash flow during the quarter. Cash flow from operations was $89 million and EBITDA was $249 million during the quarter. Our debt-to-capitalization ratio declined to 41% at the end of the period. Frank, would you give our financial report, please.

Sure, I'll be glad to. As Jeff had mentioned, net sales came in at $1.864 million or 3% decline from the prior year. Although we had strong sales growth in Europe, it was offset by the declining U.S. residential market. Our gross profit as a percentage of net sales came in at 28.1%, that's 130 basis point improvement over the 26.8% margin that we had in 2006. This primarily reflected the improving Unilin margins that we experienced in our business. SG&A as a percent of net sales came in at 18.9%, slightly up from the 18.3% we experienced last year. This was primarily due to the lower sales dollar impact -- lower sales dollars impacting our percentage to net sales. Operating income improved to 9.2%, up from 8.5% in the prior year. Interest and other expense was $37 million down slightly from last year. We were impacted positively by $9 million of Customs refunds this year and also by lower debt levels. However, offsetting the lower debt levels were higher interest rates and lower capitalized interest. Income taxes for the period were $44 million. This represented a 32.5% rate, slightly down from the 32.9% rate we had last year.

Net earnings were up 14% at $90 million with earnings per share at $1.32. If we look at the separate segments, the Mohawk segment sales were $1.048 billion, down 9% from last year. Again, reflecting the softness in the residential markets with operating income at 4.6%, down slightly from the 5.7% margin we had in 2006. Dal-Tile sales were $467 million, down 2% from last year, again, reflecting the impact of the residential industry, with operating income at Dal-Tile at 13.8%, compared to 14.7% last year. Included in this year were certain plant shutdowns as well as continuing investments in SG&A for future growth. The Unilin segment sales were $352 million or up 16% from last year. If we were to look at the Unilin sales on a constant foreign exchange rate, the sales growth was about 9%. Operating income for Unilin showed an impressive 17.2% compared to 13.2% last year. Included in operating income was about $3 million of favorable impact from foreign exchange.

In the corporate and elimination segment, operating income was about -- operating loss was about $3 million. That compares to about a $11 million loss last year. The improvement this year is primarily due to timing of payments. If we look at the full year last year, it came in at about $33 or $34 million and we would anticipate that same amount for this year. Turning to the balance sheet, accounts receivable came in at $949 million, representing about 42.2 days outstanding. Inventories were flat at $1.245 billion, representing about 89 days on hand or turned of about 4.1 times, both of those flat with last year. Our fixed assets were a $1.865 billion. Included in that were capital expenditures during the quarter of $25 million and depreciation and amortization of $74 million. We continue to estimate total capital expenditures for the full year to range from $250 to $300 million and total depreciation and amortization to be about $305 million.

Total long-term debt was $2.7 billion at the end of the quarter and, as Jeff had mentioned, our debt to capitalization declined again to 41%, with the debt to EBITDA ratio improving to 2.4 times. And we paid down about $84 million of debt during the quarter. Jeff, I'll turn it back over to you.

Thank you. The U.S. economy is growing at a slower pace than historical. Employment levels remain good with income continuing to grow. Mortgage rates remain at historically low levels. New home sales continue at a depressed rate. The slower new home sales are negatively affecting the whole flooring category. Home prices have declined in many areas and appear to have deferred customer spending and remodeling projects. We continue to adjust our business for the present conditions while managing for the long-term. Our Mohawk segment sales continue to be impacted by the downward trends of the industry. Industry sales declined more in the first quarter than in the fourth quarter. The residential sales are in a cyclical downturn similar to those of prior decades. Historically, high growth years follow these contractions. The commercial channel continues stronger with the modular carpet category increasing market share. We're beginning to market our new carpet tiles with non-PVC technology we call Encycle. It is more environmentally friendly, including a recycled content of 35%, a reduction of total material content and in the future it can be recycled directly back into new carpet tiles.

We continue to make environmental sustainability a fundamental part of our Company strategy, including bio-based materials, renewable energy and the recycling of both post-consumer and industrial materials. The business has reacted well to the cycle. We've adjusted our production levels and staffing to match incoming demand, resulting in negative overhead absorption during the period. We closed a small high cost staple plant during the quarter. We continue to find new ways to improve our productivity, but it has not offset low production levels. We're expanding lean manufacturing techniques to improve efficiency, quality and working capital usage. Raw material cost averaged about the same as the last quarter. But the recent spike in oil prices though, we're seeing our suppliers announcing price increases which will raise our costs. We're evaluating increasing our selling prices to compensate for these higher costs. With lower volumes, the industry has increased promotions to stimulate sales.

We continue to minimize the total impact by segmenting the products and limiting the promotion periods. Our product offerings are being revised to adapt to market dynamics, favoring filament yarns and polyester, which has increased less than staple, nylon and [INAUDIBLE]. We're also streamlining our product SKUs by taking out duplication and still providing a complete selection. This will result in higher productivity and service levels. We're investing in samples rates higher than the present sales level to consolidate SKUs as well as position our business for the future. We continue to invest in both our new Mohawk branded laminate programs and new carpet programs during the quarter. Our Dal-Tile segment sales declined 2% from the prior year and our margins remained good given the environment. Our early investments are minimizing some of the declining trends affecting the entire industry. Commercial remains positive and is expected to be strong throughout the year. Some product and transportation price increases were implemented during the period to cover cost changes we incurred.

We also opened three new sales galleries in major markets during the quarter to continue strengthening our position for the future. In response to the industry decline, reducing outsource purchases of ceramic tile. The process of matching these products with manufactured ones requires time to plan and execute. In addition, we have reduced production levels resulting in negative volume variances. Increased freight costs also impacted our margins during the period. Over the past year, we have continued to invest in sales, marketing and distribution points to support a growing business. These investments will positively affect our long-term sales, but in the short-term will result in higher SG&A costs. We're focusing our marketing efforts on a commercial and remodeling categories, while the new home building remains slow. Unilin's performance continues its positive trend and has again exceeded our expectations, with the European market growing faster than historical. Given the good results, we believe Unilin will exceed our prior expectations of 16% to 16.5% operating margins this year.

The U.S. laminate business was affected by the weakness in the residential business, as were the rest of our businesses. We continue to introduce new product innovation to maintain our position of style leadership in the category. In Europe, we implemented price increases in both our laminate and other board products to offset rising energy and raw material costs. Higher demand in the area is positively affecting our costs and enabling Unilin to pass through cost increases to maintain our margins. A weaker dollar is also making U.S. production more advantageous than in the past. In the U.S. our costs also increased during the period as lower lumber demand reduced the wood chip supply and increases in chemicals affected our resin cost. Our intellectual property position remains strong as we continue negotiations with other flooring companies. Our recent success in both the U.S. and European legal systems has bolstered the strength of our patents in the marketplace. U.S. Customs is beginning to stop products from entering the U.S. borders that infringe on our patents.

We've signed a cross license agreement on profile patents with [Felinga]. This will stop most legal disputes on the validity of our patents and will allow us to more aggressively protect our technology and increased licenses. We still have a limited number of companies with which we have ongoing disputes and will not receive cross licenses. These may require additional legal action in the future. In an internal review, we discovered that Mohawk had exchanged employee compensation information with its competitors while gathering market data. The Company has discontinued this activity and has voluntarily disclosed it to the Department of Justice. It is now under review and there has been no determination of any wrongdoing. We continue to operate the Company in a very conservative manner and are very compliance oriented. The Company believes that this matter will not be material to its financial condition and will not affect our customers or have any impact in the marketing or selling of our products. The Company does not expect substantial improvement in the operating environment during the second quarter.

The management team is committed to maintaining the proper balance between cost cutting and being prepared for recovery. Based on these factors, the guidance for the second quarter of 2007 is $1.51 to $1.60 earnings per share. This guidance does not include any additional refunds, which are expected to be paid by U.S. Customs in the second quarter. We've received about $30 million of the more than $40 million we anticipate from U.S. Customs. The industry goes through these cycles every decade. They're brought on by a contraction of the new home market and slowing economy. Pent up demand is created during the downturn, which leads to higher growth as we come out. Mohawk generates strong cash flow and working capital declines when volume decreases. The management is putting greater controls in the business and reacted to the conditions. I'm proud of the efforts of our management and the results given the environment we're in. We'll now be glad to answer questions.

[OPERATOR INSTRUCTIONS] Your first question comes from the line of Eric Bosshard with Cleveland Research.

Good morning, this is actually Mark Herbek stepping in for Eric.

I don't know if I'll let you ask a question then.

First question, real quick, anything that you're seeing today that makes you more bullish for the second half of the year outside of just easier comparisons?

If you look back since the industry started slowing in the third quarter, each quarter it has gotten consecutively worse than the prior one and we, like the rest of the world, are trying to decide is this the bottom or will it go further and we don't have any more information than you do. As we always say is that our forward view of our revenues is very short and basically it is all instinctive guesses from what's going on. So, we hope it is, but we have no idea.

Ok. Secondly, on carpet margins and profits, I saw double digit increase in the fourth quarter and a double digit decrease in the first quarter. Can you explain what the delta was between quarters?

You're talking about fourth quarter to first quarter.

Yes.

Seasonal.

One is that you have normally the first quarter is the lowest volume that we have. Normally, the first quarter is much lower because we don't have as much production moving through the plants. In addition, in most years, we tend to build inventories greater during the period and run the plants harder. So in keeping the -- with the volume going down, the plant runnings are much lower than they have been historically, so we're having to absorb those overheads as we've gone through. I would guess that's the biggest impacts in the cost side.

Ok and then on pricing, any color on which categories you plan to push through prices? Is it soft, is it going to be the soft surfaces and hard surfaces or do you have any color on that in particular?

I guess the majority of the comments were around the soft surface business that is oil base -- most of the raw materials are oil-based. Given that the oil prices have been rising in the last few weeks, given that chemical prices have been high due to demand, and we're receiving those, if they continue like they look at the moment, most likely we'll attempt to pass those through to our customers at the right moment in time.

Expected to be in the second quarter?

We haven't made those decisions yet. We're still gathering the information as the fluid market. We haven't concluded what we're going to do at this moment.

Ok, thank you.

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

Good morning.

Good morning, gentlemen. I just wanted to be clear, Frank, on, and Jeff, on the numbers that you cited with respect to the Customs Department. You said you had received 30 of the 40 you were expecting. Was that 40 kind of a catch up on kind of a backlog of amounts due to you and then subsequent to the satisfaction of that $40 million payment, there would be an ongoing stream of custom payments? Or once this $40 million has been repaid, is that it and we shouldn't expect to see any further contribution from the Customs?

The $40 million relates to past transactions where product manufactured in Mexico was coming back over into the U.S. We manufactured in Mexico coming back over to the U.S. to Dal-Tile. And the Customs Department had classified it incorrectly and had charged duties that were too high. So, the $40 million represents the process by which we are getting refunds back from the government for that past history. Perspectively, they've already lowered the duty rate so that going forward, the savings, if you will, or the lower duty is already reflected in our ongoing operations.

Ok. So, we shouldn't expect to see an ongoing stream of payments from the Customs Department?

Our best estimate right now is that we should receive some amount over $40 million, of which we've already received about $30.

Ok. The timing on that remaining $10?

We're working with the government.

Ok. That says a lot. I just wanted to be clear on your guidance of $1.51 to $1.60. What are you assuming in the way of operating margins for your Unilin segment next quarter? You'd indicated you thought you could do better than the 16.5% longer term guidance for the year, but what about for the quarter?

What we said was, as I've already said, is that we gave out general direction, it would be 16 to 16.5 for the year and that we believe, given the performance we had in the first quarter, it is going to be greater than that. Not breaking it down more than that. In our whole businesses, we basically give a one quarter direction and it is built into our best estimate for next quarter.

And I know you've been collecting Customs fees prior to this. Revenue was up 16% on the quarter. EBIT was up 50% on the quarter, presumably, there was a good slug of Customs payment in there.

That's not true, David. The Customs are all included down in other expense.

Ok.

Below the line.

So you've just got a very good contribution margin coming through on the business right now.

It is different pieces. The Customs is coming from a Dal-Tile ceramic business rather than Unilin. You're confusing the Unilin business with the Dal-Tile. And then in the numbers that you're seeing for Dal-Tile, they don't show an operating margin. They show below that.

Ok, I understand. Thanks for clarifying that. Finally, can you give us the current mix between nylon, polypro and polyester in your carpet business?

I don't have the percentages in front of me but the polypropylene is declining, staple nylon is declining and increasing is polyester and filament nylon. I don't have the percentages but we'll be glad to give you some trend lines later.

If you call me back, I can help you out with that problem, Dave.

Thank you very much, gentlemen.

You're welcome.

Your next question is from the line of Michael Rehaut with JPMorgan.

Hi, good morning.

Good morning, Michael.

Couple of questions here. First, on the raw material cost, you mentioned that they're going up. You've seen a recent escalation in oil and related costs from suppliers. Would it be fair to say, given that you're still kind of evaluating what type of price increase, that you could see further compression from these levels at least on a year-over-year basis going into the second quarter? In the Mohawk segment?

It is too early to conclude. Based on what we knew going into the quarter, it is built into our estimate of all the changes we're aware of. It is a fluid marketplace and the question is where are they going to end up and what is going to happen to pricing. Both things are not concluded at this moment.

Ok. On the commercial side, you had mentioned that you had pretty good results in both the Mohawk segment and I believe the Dal-Tile segment as well. I was wondering if you could remind us, roughly, what percent of sales, let's say for '06, in both segments was commercial versus residential and if you experienced -- what the level of growth was for commercial in the first quarter in both segments.

That's a lot of questions.

The average of the whole business I believe is about 25% to 30% is the entire business. If you look at the different segments, the Dal-Tile would have a higher average in commercial and the Mohawk business would have a lower percentage in commercial. And what were the rest of the questions?

The second question was in the first quarter, did you have in both the Mohawk and the Dal-Tile segments, did you have mid single-digit growth, high single-digit growth, what was the level of strength there?

We don't break it out by product type in each piece. But given that the commercial business is a greater percentage of Dal-Tile's business, had a more positive effect on them. The commercial business, there's some industry numbers that say it was up 1% or 2%.

For carpet.

For carpet is the industry numbers for the first quarter.

Ok, thanks. One last question if I could. You mentioned on the Dal-Tile that you're reducing your outsourced purchases. I would assume those have a lower margin than your manufactured tile and I was wondering if you could kind of give us a sense of your Dal-Tile sales in '06, what percent were through outsourced.

If you don't hold me to it, I would guess about 25% to 30% of our sales were through outside -- outsourced product. And we are bringing some portion of those inside. We've already brought in portions of it as we go through. In the outsource products what happens is that you have to order them with long lead times. So as we were going into the slow environment, our inventories were going up because we had already committed to purchasing those products and those are now flowing through the business. In addition, we're matching various ones and bring them into our production. It will be less -- it will drop significantly this year.

What type of margin differential would be between the outsource then your manufactured tile?

It is different for every product.

I mean 100 basis points, 500 basis points on average, can you give us a rough idea?

We don't really have that.

I don't have that in front of me. I'm not sure what you would do with it after I gave it to you.

You have less outsource sales, you can improve your margins.

I am but I also have lower dollar volumes through, so my costs are being spread over a lower volume offsetting that.

Ok. All right. Thank you.

You're welcome.

Your next question is from the line of Keith Hughes with SunTrust.

Hello, Keith.

How are you? Let's see, on inventory now, specifically in the carpet segment, we get a just an amalgamated number but is carpet down significantly year-over-year in inventory at this point given the production declines?

We're looking.

That's fine.

Why don't you go to your next question?

Frank's looking that answer up, we'll get that one in the middle.

I guess the next question I have, and I know you've struggled answering this in the past, but in terms of capacity utilization, if you look back historically, Jeff, given what's been just horrendous unit declines in carpet, is this one of the lowest capacity utilizations you've been running in carpet?

The answer is yes. The last time that the industry -- the industry goes through these things so if you go back, the industry had something similar to this, I think, in '91 when we had a collapse of the real estate markets and the interest rate. And it had happened before that, I believe it was '83, with the high mortgage rates. And prior to that, I think it was the mid '70s would be the three points. It seems like once a decade, we have one of these wonderful occurrences.

If you remember, I know your family's been in this business a long time, was it this bad in carpet during those cycles?

I was with a private business and we -- my business was actually flat to up a little bit because we were in a high-growth point, while the rest of the industry was suffering.

Right.

Last reference point in '91, I believe.

Ok. Frank, you just call me back on the inventory number if you're still hunting for it.

Keith, the turns are actually a little bit better and the dollars are down. I can talk to you a little bit more about it if you want to give me a call later.

That would be fine. Thank you, guys.

Your next question is from the line of Margaret Whelan with UBS.

Hello, it is actually Susan for Margaret.

Hi, Susan.

Can you give us some sense seasonally of how the Unilin business trends as we head into the spring and summer.

As you can tell from our historical guesses the last year, our guesses on a going forward basis have not been too good the last year. We're still learning about how the business works. There's more volatility in it than we are and I wish we were better off at guessing it than we have been. It has more volatility because the business -- the cycles move. There is some channels that can buy, more or less, and move it from period to period, depending upon where it is happening. And I mean, we expected -- as you know, we expected the first quarter to be much less than it was and we were pleasantly surprised by missing the guess.

It's a good problem to have.

Right. But so then seasonally, as you get into the spring, does it -- should it tend to pick up and then maybe drop off a bit as we go towards the third quarter? Can you give us any sense?

Usually, the first quarter and the third quarter, because of the European holiday season, would be the slowest. And the second and the fourth would be the strongest.

Ok. And then just kind of changing tracks a bit. You've obviously done a great job at paying down your debt over the last year or so. As you're now approaching that 40% debt to cap target that you've set, what will be the bigger uses of cash going forward?

As always, we continue to look for acquisitions that meet our criteria and help our long-term business. In those, we've said before, that things that are of interest to us is having a wood position in the marketplace in North America and looking at acquisitions in other economies that fit our business process that will give us entry into other markets we're looking at. And we constantly look at those. Second has been to pay down debt. Third has been to buyback stock. And we have not given any consideration at this point to paying dividends. So, they remain the same priorities as we have in the past.

Ok. And as business has slowed, have you seen any change in the acquisition pipeline?

We're constantly talking to a number of companies at all points in time. And we continue to talk to companies.

Ok. Then just finally, can you give us some sense of how you think about acquisitions versus buying back stock or paying down the debt?

Yes, typically, that we -- our priority is acquisitions because we believe that the acquisitions offer us a long-term way of increasing the profitability of the business and we look for acquisitions that have potential to grow the top-line revenues and that we have potential in owning them that we can add value to them beyond the normal just owning of the business, as we go through. The buying back stock. We basically look over and say what is the potential for acquisitions over time and what is the -- is the marketplace undervaluing the stock, could be something that changes the way we look at it. Versus the debt and you have to throw in our long-term debt that sometimes we have and don't have ability to pay down more or not. We blend all of those together and from all of that, we decide what we should do with the capital at any given moment in time.

Ok, thank you.

Your next question is from the line of Laura Champine with Morgan Keegan.

Good morning.

Good morning, Laura.

Do Unilin's operating margins reflect any positive impact from licensing fees or other intellectual property revenues you might receive?

All the revenues that we get from licenses are in the Unilin result.

And the -- given that the Unilin margins are up 400 basis points year-over-year. Frank, can you comment on how much of that increase came from better revenues on the licensing side? Any portion of that profitability increase that came from non-OEM business?

I think the increase came from a number of things of which patent revenue would be included in there. I would not -- I would say that's not the most dominant factor in the increase in operating margins.

Can you qualify that to some extent? Is it 100 to 200 basis points, is it even less than that? What do you think the contribution was roughly?

We don't breakout them separately as we really have a very limited number of transactions that occur in a given year. And that if you start breaking them out, you can actually back into the actual amounts by each contract or position that we take. We think that that would be detrimental for our execution in maximizing the value to our shareholder.

But it is fair to say that it is not the dominant reason for the increase in margins, does that make sense?

9% increase in sales didn't hurt anything.

Got it.

Exchange rates don't hurt anything.

Ok. Thank you.

Your next question is from the line of Sam Darkatsh with Raymond James.

Good morning, Jeff, good morning Frank.

Good morning, Sam, how are you?

Doing fine. Most of my questions have been answered and asked. The question I have -- getting back to the second quarter guidance with respect to the rising input costs, a prior questioner asked the point, normally when you raise prices and when you have rising costs, it does tend to negatively impact your margins as the lag between your input costs and your selling price hikes. What specifically are you assuming for Q2 with respect to that? Meaning, if you end up deciding to raise prices because oil prices get to that point, could operating margins be at some risk or is that already incorporated within the guidance or could there be upside if you raise prices versus current? Could you just give a little bit of color on that, please, if you could?

It is included in there, what we know. It is a fluid environment. It can negatively impact our future results. We are going to have to increase prices, if what we see today is true and maintains itself, we're going to have to increase prices or have to absorb it in margin, which is why we have said that we're considering and evaluating a price increase.

I guess the next question then would be in prior calls you've noted that the -- the selling environment has been more promotional than in the past. How elastic do you suspect demand might be in this current environment to further price increases?

I don't think that the demand is being driven by the price of the product, the significant increase and decrease in the overall demand. It is being driven by the housing marketplace. It is being driven by people's perception of their home values. I think that some people are not investing in the redecorating of their homes because they don't -- used to be if, in the past two or three years, if you put $10,000 in remodeling your house, you might expect to get $20,000 more for it. All of those things are impacting the present volume of the business. There is no way to know what a price increase would or wouldn't do except we can guarantee that if our costs go up and materials, which take a large portion of our cost, that it is going to detrimentally affect our margins and the industry's margins. And if you look back over the past three to four years, the industry has attempted and executed to pass those through relatively well.

So, has there been an easing then of late of the promotional environment that you referred to in prior calls or it is just maybe in roll goods or just in certain products that you're finding that promotional activity?

I think that the promotional activity is going on at levels similar to where it's been the last quarter or two. As the industry volume has decreased and in this typical low part of the year, we typically, as an industry, do more promoting and it is being done in the same ways. I think we've shown -- we have shown reasonable discipline in how we're going about it. And that we're trying to control it so we don't collapse the entire pricing structures of our products. But it is there.

Very good. Thank you much, gentlemen.

You're welcome.

Your next question is from the line of Steve Fockens with Lehman Brothers.

Hi, good morning. First question, in the past you guys have said that you thought that greater competitive or the higher competition in laminates would moderate margins somewhat in that segment and certainly, we don't appear to have seen that yet. Would you still expect that to be the case or do you think that some of the recent positive patent news might limit or moderate future competitive impacts relative to what you thought in the past?

Will let me try to answer it. The first is that the productivity of the equipment and efficiencies over years has increased. As that has increased, that has allowed the industry to sell product at more competitive prices. That's going on. Second is that the mix of products -- we've said in Mohawk that the mix of product that we've been selling through Unilin have tended to be focused on the medium to high-end of the marketplace. And we said that we thought that we would spread our marketing across a broader price spectrum and that that would pull down the average price by participating in a broader category of the marketplace.

But in terms -- from a patent protection, do you think that in it -- that separately gives you greater margin power going forward than you may have thought?

I think that there will be a higher percentage of the marketplace paying patents, licenses, and I think that that will impact the market prices. They have to pass them through. So, the people that have been skirting around the outside of it will have to participate in it.

Ok. Fair enough. Secondly, I think you guys hinted at this earlier. But do you expect positive cash flow from working capital this year?

It depends on acquisitions that we do through the next nine months, if any, and if we didn't do acquisitions, we would have.

It also depends on the timing of the recovery. Generally, as the business winds down, then that generates working capital. As the business heats up, then we use working capital. So, that's a factor we would have to consider also.

Ok. Fair enough. Thanks very much.

Your next question is from the line of Douglas Pratt with Mesa Capital.

Thanks very much. Two quick questions. Tax rate was down this quarter. What should we look for in expectations of a normalized tax rate or for the full year.

I think in the 32.5% to 33% range. The thing that impacts that is our distribution of income between the different taxing jurisdictions. So, if that mix changes, it could change the rate up or down. But I'd say use 32.5% to 33% going forward.

Okay. And I noticed that you had a rather large swing in the corporate level of assets and the loss from corporate side. Can you give us a feel for what was involved there, what happened during the year to cause that?

Yes, first off, as I had mentioned, we still expect to see annually in the same range, $33 to $35 million, I would say, of corporate eliminations in that segment as we had last year. The primary thing impacting it in the first quarter last year was timing of payments. And I would say that just going forward from an annual standpoint, you should probably anticipate the $33 to $35 million.

Ok. What about the large swing in assets to that sector?

I'll have to get back to you on that one. If you want to give me a call.

Ok. Thank you.

Your next question is from the line of [Mike Farberg] with Ramsey Asset Management.

Hi, guys. Is it fair that, when looking at your exposure to new residential construction, that as we analyze sort of quarterly data, that we should be looking at new housing completions instead of new housing starts given this point in the construction cycle that you would be installed?

I think that's reasonable. Basically, the flooring is one of the last things to go in. Usually it is done in the last few weeks of the building process. So, in the new construction part, that's the reason why, as the industry tails off or speeds up, we tend to lag it in the new construction part. On the other hand, if you look at the general economy, when it picks up, due to pent up demand that is created by people postponing decorating projects, when the economy picks up, we tend to be a leading indicator in that category.

Yes, okay, that makes sense. So, completions have just started really coming down. They weren't down in the last half of last year. Does your forecast for the next quarter incorporate, roughly, a decline in housing completions of 25% to 30% versus 18% or so in the first quarter and 0% in the fourth quarter of last year? Are you forecasting, within your projections, a pretty significant decline in -- from here in the new RES space.

What we attempt to do is take the latest information we have on our business, which would be the last quarter and last month, and we take those bases and we use those for projection. You have two things going on. One is you have our business normally has a low cycle at the first part of the year, so in generally our business picks up going from the first to second quarter. And then offsetting that would be all the indicators that we have in new housing as well as remodeling and everything else we throw into it. Most of it is our instinctive guesses, because, again, we don't have any -- we don't have long forward views of revenues. So, we're using all the information you have and we have internally and guessing like hell. We're really good when the future looks like the past.

Right. Ok. And then I don't want to talk about a specific competitor per se, but there is a lot of hype going around the commercial space about this new non-glue adhesive for carpet tiles. Can you just comment as to whether that's as strategic or revolutionary as it is being portrayed and/or whether that's started to impact you from a competitive selling perspective.

I think you'll have to ask them on how they're doing on their product. I can tell you that our carpet tile business continues to grow. That we're bringing in new product categories and new technology. That we expect it to help pace the rest of our commercial business going forward. We wish them well with all theirs.

Right, right. So they're saying it is phenomenal. Is this something that is easy to sell against, from your perspective, or can you imitate it in the near future or is it not really that big of a deal in terms of what you've seen.

We have not seen an impact on our business.

Ok. Thank you, guys.

You're welcome.

Your next question is from the line of Bob Thompson with Advantus Capital.

Hi, guys, nice quarter, given the conditions. Couple of questions. One, do you see any signs of the commercial business slowing down at all? How did the quarter go from March to -- from January to March?

The -- looking at the pieces, we're expecting -- I think that we -- I mean the commercial business, like others, always pick up as you go -- same thing, our first quarter is the slowest quarter of the year, so normally we anticipate seeing increases in that as we go through the year. And we're seeing increases. The overall commercial business was not as strong, I think, in the industry carpet numbers as we had thought it would be during the period. There is a shift going on between higher price tile products and historical broadloom products within the industry. Everybody is looking at the data on commercial building starts, which still looks strong going forward throughout the year. There is a lot of projects that are in process today. And so at the moment, we believe the commercial business will be good throughout the year.

Ok. And is your CapEx budget still $250 to $300 million for '07?

It is. And in that we still have pieces that are strategic that we're trying to determine whether we turn them loose or not. We'll continue with that as we look through the year.

Ok. Final, with your debt to CapEx down to 40%, would you consider any large acquisitions this year?

We would consider any acquisition that made sense.

Ok. Thank you very much.

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

Congratulations on a good quarter.

Thank you.

Let's see. Well, picking up the last question about acquisitions, are you more geared to looking at acquisitions in the commercial side of the business or on the residential or doesn't it make a difference?

We're open to any business that makes sense to any category we're in. We constantly look at all options that are available. And you try not to prejudge them and judge them based on the value it brings to our shareholders.

Ok. And on the Unilin business, what -- you had to characterize some of the factors that keep on surprising you. What would they be? Obviously surprising you in a good sense.

One is that the European sales are higher than we had anticipated. If you go back a year or two ago, we would have said probably 2% to 4% growth in the European market would be good, growing with the general -- slightly to equal or above the general piece. So, the market is better. The product mix we've been able to maintain is better. The ability to pass through price increases as we receive them, we've been able to do that more in line. And normally as you go through these things there are some negative impact but you chase them up. But given the economy that's going on over there, that's helped that. The weather in Europe has been good. The exchange rates have been positive. Everywhere we go, the things are -- I would like to say that we're smart, but all the things that we've done are going the right way for us.

Again, those are good things to have. Anything that has --

We need to remember those when they go the other way.

Ok. And in the U.S. business, what -- I mean that was, I guess, you were looking for that obviously on a small base to be increasing quite substantially and it didn't do it this quarter. How do you look at the projection going forward?

Well, last quarter, the U.S. business did extremely well, so it bouncing around a little bit. We still believe it is a good business to be in. We believe that we are well-positioned within the marketplace. We are increasing our distribution with home centers in the marketplace, which we had very little before. We're moving down a track that we're comfortable with. It took us longer to execute a new product line under the Mohawk brand than we had hoped. In order to have multiple distribution channels in the marketplace, we had to develop different products so they didn't compete with each other in the marketplace. That took us an entire year to execute through the marketplace. But we're happy with the results of Unilin and it exceeded our expectations.

In the U.S.

In the whole business.

Obviously. I'm just curious, as you look out, even this year, and again it is from a low base and you've done a lot of -- you have a lot of initiatives in place.

We're in the process of -- one of the capital expenditures are we built -- we put up a new plant about the time that we had built it. It was built to hold more equipment. We are -- we have increasing the equipment in that plant, so we'll almost double the size of it by the end of this year, again So, we're happy with our position in the marketplace. We're investing more in it.

Ok. And any unusual shutdown costs as you've brought down capacity?

There are negative costs everywhere. There's two parts. One is reducing the use of the equipment that we have. In this quarter we shut down a staple plant on the Mohawk side. That was the only --

That was the only plant closing.

only plant closing. But there was a lot of short hours and short working with all of them. We have last quarter shut down a high cost ceramic plant. We've shut down other staple plants. If you look forward the next few years, the market and carpet is moving away from staples, so there will probably be more shut downs of it and increasing capacity in filament as we move forward on an ongoing basis.

Ok. And what was the cost associated with shutting down the staple plant?

This one, most -- I think it was probably less than $500,000.

Ok.

There wasn't a lot of capital left in it. It was just a normal course of events.

In my earlier remark I was referring to, when I said shutdowns, I was referring to, as Jeff had said, just adjusting the manufacturing production levels and that results in unabsorbed overhead.

All right, well, thank you very much.

You're welcome.

Your next question is from the line of Arnold Brief with Goldsmith and Harris.

I'm doing this one from memory so I could be wrong, but when I look back in the '70s, '80s and '90s, if I remember correctly, most of the downturn in housing was interest-related and the upturn in housing then was pretty quick once interest rates turned down and as usual, housing -- interest sensitive stocks were early on on coming out. This downturn is not interest-related. Interest rates are pretty benign right now. It is more related to a bubble in home prices, high levels of inventory of unsold homes, and increasing credit standards and FICA scores and that kind of thing. Do you see this downturn and subsequent upturn as being different from the past?

Again, the interest rates were low. There was more housing being built. The housing got ahead of the marketplace. Even though the long-term rates are relatively similar, if you go to the short-term rates that people were getting housing for, there were incentives to buy houses that have changed and the market slowing letting the housing market flow through. We believe that long-term, that the amount of houses being built in the marketplace, there's all kinds of estimates. But most people believe that there is going to be future housing growth in the marketplace once these flow through and the long-term growth of housing is going to be good, once we get through the cycle. Now, the timing of it, your guess is as good as mine.

Let me try a different -- I can't recall were there the same increasing credit standards in the past downturns as there are in this one?

I don't have the data in front of me.

Ok. I was trying to do it from memory also. I can recall. One second question. In the acquisition area, strategically, are you focusing on flooring related acquisitions or would you go further into non-flooring construction home building type acquisitions? I'm thinking of some of Unilin's product which is non-flooring related and to what extent you would want to build that or not build it.

Is it a question about Unilin's business or about other categories outside Unilin's business?

The question relates to acquisitions and would you focus strategically on just flooring or would you want to build some of the non-flooring activities, which Unilin happens to be a part of?

We look for things where we can add value, so the flooring business we can add the most value to, so that becomes primary. On the other hand, if Unilin has businesses therein that we can positively grow and impact, we would consider those. And getting into new categories would be the lowest option of all the alternatives.

Thank you.

Your next question is from the line of [Phillip Walker] with White Mountain Consulting.

Hi, guys.

Good morning.

Good quarter. Actually, White Mountains Advisers. Just a couple of quick questions. During the quarter, Moody's revised your outlook to stable from negative. We view that as kind of a win for the Company. Just wanted to get a sense in terms of rating goals for the Company. Is your goal to stay investment grade? If so, would you like to be above that low rung of the investment grade scale, say mid-triple B, high triple B? And then finally with the, I think, 14 million of current maturities of long-term debt that comes due in 2007, what's your plans there in terms of how you expect to, I assume, refinance it or borrow on your bank lines? I just want to get a sense as to what the Company is thinking.

What we're looking at is to maintain an investment grade rating, period. If we can get it higher, that's good. With regards to the current portion of long-term debt or what's coming due this year, we -- we've got a $300 million traunch related to some bonds that were sold with the Dal-Tile acquisition that are coming due and we're rolling them over into our revolver and then everything else that's in current is basically -- you quoted a number. I don't remember. But everything else in current would be related to just bank agreements or securitization agreements that just get renewed annually. Did I answer your question on that one?

So, nothing in terms of the public bonds coming due. It is really kind of some specialized securities.

Well, there's $300 million of public bonds that came due in April, on April 15th, which we rolled into our revolver, then everything else in current would be related to bank agreements, like a securitization or like a revolver, whose term ends in a year or less which we renew.

Did the bonds you put on the revolver, you don't look to term those out later in the year?

We'll just evaluate that as we go forward.

Ok. Sounds great. Thanks, guys.

Your next question is from the line of [David Sachs] with [Hawkey Capital].

Just briefly, the capital spending, the $250 to $300, could you just breakdown what's the maintenance level, in your opinion, and what is scheduled for growth CapEx for investment CapEx that might be deferred? Thanks.

I believe what we said that the strategic investment this year, that we had it included in the process, was about $100 million. So, that's strategic things that we would invest in which we discussed, one which would be increase our capacity in our laminate business which we've already agreed to do. Other than that, the minimum maintenance capital is probably $70 to $100 million.

The minimum maintenance level is $70 to $100.

It is in that approximate range of it. That's just to keep the business operating and keep things updated and the normal things you have to do to keep up with your business.

But I wouldn't put that number in your mouth.

No. Okay. And that's against the 305 of D&A. How much would that laminate capacity that you've agreed to be. Is that a $50 million number or is that a more substantial than that?

It is less than that.

Terrific. Thank you very much. Great quarter.

Thank you.

Your final question is from the line of [Lori Bilker] with Dillon Read Capital Management.

My question has been answered. Thanks.

Well, that was an easy one. I think that we've done very well in the quarter given the economic circumstances and the cycle that we're in. Our people are working very hard to manage through it. Our forward views are very poor and we'll keep reacting to the business as it goes through. We think that the flooring category is very good and we continue growing on a long-term basis and we appreciate everyone coming to the call. Have a nice day.

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