莫霍克工業集團 (MHK) 2008 Q1 法說會逐字稿

Good morning. My name is Bethany, and I will be your conference operator today. At this time I would like to welcome everyone to the Mohawk Industries first quarter 2008 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 18th, 2008. Thank you. I would now like to introduce Jeff Lorberbaum, Chairman and CEO of Mohawk Industries. Mr. Lorberbaum, you may begin your conference.

Good morning. And thank you for joining us for the Mohawk first quarter conference call. With me I have Frank Boykin, our CFO. We appreciate your interest in Mohawk and will review the current business environment, the company's performance, and our strategic direction. Before we proceed, Frank will review 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 and Exchange Commission. Jeff.

Thank you. Our performance for the first quarter exceeded our guidance for the period in a very difficult environment. First quarter net income was $65 million and diluted earnings per share was $0.95. Last year in the period a $9 million pretax custom refund was included in other income and did not reoccur this year. We're still anticipating additional refunds to be received in the future. Net sales for the quarter were $1.7 billion reflecting a decrease from the prior year of 7%. Our balance sheet remains strong with debt to capitalization at 32% and debt to EBITDA ratio at 2.3.

The U.S. economy continues to slow, and many believe we've already entered a recession that has not yet been recognized. The economy is being impacted by tightening credit, contracting residential home sales, declining consumer confidence, and increasing costs. The flooring industry is in a cyclical downturn with residential and a significant decline. Spending in the commercial channel has remained positive though it's expected to slow in the future. The U.S. flooring industry is entering its third year of decline.

In Europe we began seeing slowing trends in the fourth quarter last year as U.S. credit problems affected Europe. Growth is different country by country. And the U.K. and Spain are slowing more than the balance of western Europe. Most economists predict flat to modest growth in Europe overall with eastern Europe and Russia still maturing with higher economic expansion. All of our business segments have managed through cyclical down turns in the past. We're presently anticipating weakness in the flooring industry with a future rebound beginning in the remodeling channel when the economy improves. All segments are focused on: improving productivity and quality, reducing infrastructure, passing along increased costs, controlling working capital, and investing in products and assets which will enhance our future. Frank, would you please review the financials.

Yes. If we first look at the income statement, net sales came in at $1.738 billion, or 6.7% down from last year. We experienced a decrease in our U.S. residential business which was partially offset by our U.S. commercial business, our acquisition of Columbia Wood Products, and favorable foreign exchange. The gross profit for the quarter came in at $460 million, or 26.5% of net sales comparing to 28.1% last year. The decline in gross profit was primarily related to lower volumes and increasing raw material and energy costs. SG&A was $336 million, or 19.3% of sales, which compares to 18.9% last year. SG&A dollars are down $17 million from last year, or 5%, but we had less leverage on lower sales this year.

Operating income margin at 7.2% compares to 9.2% last year. Interest at $34 million was favorable to last year, down primarily because of lower levels of debt. And as Jeff had mentioned in the prior year, 2007, in other income we had a $9 million favorable pretax benefit from the U.S. customs refund. Our income tax rate for the quarter was 25.5%. That compares to 32.5% last year, lower this year because of the European tax planning that we put in place in the fourth quarter of last year. We continue to expect that our future tax rate for this year will be in the 26% range. Earnings per share coming in at $0.95 a share, down from last year, but better than the results that we had initially anticipated.

If we move to the segment information, looking at the Mohawk segment, sales came in at $905 million, down 13.6% from last year. This segment was more impacted by the residential decline than our other businesses with both soft and hard surface products down, but hard surface products in this segment impacted more. Our operating income was 2.5% of net sales compared to 4.6% last year. Margins down here in this segment due to decline in volumes and increasing raw material and energy costs.

In the Dal-Tile segment sales came in at $449 million, down 3.8% from last year. However, they were still able to outperform the emphasis -- outperform the industry with emphasis on commercial and high-end residential. Operating income came in at $57 million, or 12.7% of sales comparing to 13.8% of sales last year. Much of the margin impact was related to higher freight costs this year. And then the Unilin sales came in at $404 million up 14.7% from last year. Sales actually declined 6% year-over-year if you exclude the Columbia acquisition and look at sales on a constant exchange rate basis. Operating income came in at $50 million, or 12.4% for the year -- or for the quarter for Columbia, or for Unilin, compared to 17.2% last year. Our operating margin would have been 14.9% without Columbia. We were favorably impacted by foreign exchange by $5 million in operating margin.

Operating income for the corporate and elimination segment was a loss of $5 million compared to last year's loss of $3 million. We were impacted this year by higher inner company sales and eliminations related to products sold between segments. We expect the year to date loss through the end of the year to be in the range of $30 million to $35 million. If we move to the balance sheet, our receivables ended up at $955 million, with our DSOs at 45 days, up slightly from 44.5 days last year. Our aging -- our account receivable aging is still in very good shape. Remind everybody that we have a very diverse group of customers with over 30,000 customers and not one customer that exceeds more than 5% of our total receivables or sales.

Inventories came in at $1.296 billion. This year the inventory included $50 million related to Columbia Wood Products that we did not have last year. Our inventory turns were 4.0 times compared to 4.1 times last year. And in fixed assets which ended up at about $2 billion we had capital expenditures at $56 million with depreciation and amortization of $73 million. Our total long-term debt was $2.370 billion, and if you look at our debt, we did maintain a strong balance sheet this year with a debt-to-cap ratio of 32%. Our debt increased from the fourth quarter about $77 million excluding the impact of currency. The increase was driven primarily by timing issues in receivables and payables. Receivables were impacted by calendar shift between Q4 and Q1, along with changes in the timing of dealer shows and related product roll-outs. Payables were impacted as we internalized previously sourced products such as ceramic, wood, and laminate flooring. We expect cash flow for the year to be positive excluding any new strategic initiatives. And with that I'll turn it back over to Jeff.

Thank you, Frank. The first quarter was challenging for all our segments, but all showing a decline on a local basis. All of our segments have strategies to react to slowing demand and rising costs. Our Mohawk segment was -- has continued to slow through weak industry conditions resulting in sales declining about 13.5% in the quarter. New residential construction is running about half of peak levels. Remodeling sales continue to slow due to low existing home sales and postponed customer purchases.

Mohawk's hard surface products and cushion sales have fallen more than carpet in the segment. We've exited the sales of our flat woven product. Our price increases in carpet are being implemented and should be completed by the end of the second quarter. Additional reductions in infrastructure costs and production levels were made during the period to better align with present volumes. Productivity improvements were made throughout the operation. Some high-cost production lines were idled and production consolidated into other more efficient lines. New residential introductions are being shipped earlier than prior years and are concentrated on fashion and valued engineered products. Many Mohawk-branded wood products are now being manufactured by Columbia rather than sourced.

A new Mohawk consumer campaign is being launched that coordinates TV, print, and digital marketing, appealing to the design enthusiast with fashionable styling and superior selection. Commercial product sales are stronger than residential. We've consolidated our commercial product into four distinct brands each with its own sales and distribution channels. Regional strategic account managers are in place to coordinate our products and brands across channels. Carpet tile continue to grow, and we're increasing our offerings in all our brands, including a new well styled value collection under our Bigelow brand. Our new [end-cycle] tile has leading edge technology with significant benefit that make it more durable, contains recycled content, used less petroleum resources, and has advantages economically. In addition, we're introducing a computer technology to accurately reproduce Mohawk floors in our designer's rendering to allow property owners to easily envision their projects.

Raw materials and energy costs are rising, and may require future pricing actions in the segment, many initiatives to reduce energy and water consumption are being implemented in our operation. Our nylon staple sales continue to soften as product have become less competitive. In the second quarter we're closing another staple manufacturing facility. This year we're investing in additional filament extrusion capacity that can produce any fiber type. The first machine is beginning production and will replace older higher cost assets. Our distribution costs have been reduced to correspond with the business levels, though some infrastructure will require some time to exit. Customer service levels are being maintained as we balance capacity with demand. A new supply chain system is being installed with more sophisticated methods of maximizing customer service and use of working capital.

Our Dal-Tile sales in the quarter declined 4% which we believe outperformed the industry again. Strong growth in the commercial segment is offsetting some weakness in the residential market -- some of the weakness in the residential market. Our sales in Mexico and Canada have continued to expand as we increase our penetration of those markets. Our distribution system is being expanded with the opening of a new service center in Michigan, and we have three to four more planned for this year. Our sales force and new introductions are focusing on the better performing commercial, multifamily and premium residential market.

In the home center channel, new product placements are rolling out in the second quarter which will increase our position. Our ceramic price increases initiated in the fourth quarter are substantially implemented. In April, we're executing selective price increases and raising energy surcharges to pass along increased costs for natural gas, fuel and currency. Cost reduction initiatives remain a priority concentrated on SG&A, freight, raw materials, manufacturing efficiency and inventory management. We're utilizing raw material sources closer to our facilities to reduce costs and have recently started a mining operation in Mexico to provide some of our materials there. To minimize distribution expenses, we're utilizing lower cost transportation modes and increasing the shipping weight per load.

We've enhanced our forecasting, increased plant utilization and reduced purchases of sourced products to improve our inventory management. New manufacturing equipment is being installed which will add new color body styling and precision sizing capabilities to our product offering. A trim line was closed in Dallas, and a production was moved to Monterey, which is more efficient. Dal-Tile's new glazed porcelain tile called Metro Leather won a dealer's choice award at the national show for the best ceramic tile introduced. The Unilin segment sales were up 15% as reported in the first quarter and up 5% on a constant exchange rate. Unilin sales were down 6%, excluding our wood acquisition on a local basis.

Both the U.S. and European market slowed with growth continuing in the eastern Europe and Russia. Sales grew in our U.S. laminate and European roofing systems with the other products slowing compared to the prior year. Our new laminate product introductions including a water resistant technology and a random link easy installation product are being -- are beginning to reach the market. New consumer campaigns have started in Europe and we're expanding our distribution in eastern European and Russian markets. Our costs have increased in the segment due to: plant start-up expenses, rising energy and materials, higher cost for U.S. imports, and lower overhead absorption. Price increases are being executed in some markets to offset rising costs and currency changes. Reductions in staffing and production levels are being made to follow the industry trends. Several cost reduction programs and logistics and raw materials have already been executed. Our U.S. flooring expansion should begin production by the end of the second quarter and will reduce imports of higher cost products from Europe.

The wood manufacturing team continues to improve operational costs and quality as planned. Our wood production is operating at a loss as anticipated and experiencing lower volumes with the industry. Additional investments are being made to increase automation and enhance our capabilities. We're launching new distressed and antique looks as well, as a new patented installation system to enhance our position. During the quarter "Training Magazine" recognized Mohawk as one of the nation's top 20 U.S. companies for its internal training programs in 2007. Although seasonal improvements will benefit the second quarter, we expect to have many of the same challenges we faced during the first quarter.

Weak demand and higher costs in the U.S. and Europe will pressure our future results. We will adjust our business as changes in customer demand and costs require. Lower debt levels, reduced tax rate, and beneficial exchange rates will positively affect our future results. Based on these factors our guidance for the second quarter of 2008 is $1.36 to $1.45. In spite of a difficult flooring market, Mohawk continues to modernize manufacturing facilities, create innovative products, and launch exciting advertising and promotional campaign. We're positioned with a more dynamic and cost effective enterprise for the turnaround that always occurs. With that, we'll be glad to take questions.

(OPERATOR INSTRUCTIONS) Management requests that you limit your questions to one primary and one follow-up. (OPERATOR INSTRUCTIONS) Your first question comes from the line of Sam Darkatsh with Raymond James.

Hey, Frank. How are you?

Good morning, Sam. How are you doing?

Couple quick questions. First off, commercial has been really hanging in there and has been helping out with offsetting at least a part of the residential downturn. Are you seeing any recent signs of a slowdown in commercial, or are there specific parts of the commercial end markets that are a bit troubling, or is it still pretty much the same sort of demand trends that he have been seeing for some time?

Demand is still hanging in, but it appears that the future project that are being worked on by the designers could be slowing down a little bit and we won't see that for a while. Our best guess is that for most of the year we should have reasonable business throughout this year as far as we can see, but we'll have to see what happens. But we believe it's going to slow down as we go forward.

The only other thing to add to that, Sam, flooring goes in at the very end of the construction cycle, so there's some lag there, to our benefit.

Got you. Second question, you're using your free cash flow to pay down debt at this point as opposed to either making acquisitions or buying stock back. Could you talk about that going forward, with your debt seemingly in pretty good shape here at this point? What your preference is to use for free cash and what your appetite might be for acquisitions at this point?

We really like the positioning we're in. We like that as the business goes through the cycle we believe there will be opportunities come available. We'll continue evaluating those as they come. Those will be most likely offset against -- at would point do we decide that we haven't found the right acquisitions to do, and at some point if we don't find the ones we'll probably go back and buy stock back at that point, and if we can't do any of those in between, we'll be paying down debt as we continue if one of those don't happen.

Last question, then I'll defer to others. Unilin margins always seem to be troublesome, at least for us, outside of the company to try and model, and they've declined for three quarters in a row now. How should we look at Unilin margins over the course of 2008 based on input inflation, based on Europe slowing a little bit? How should we look at that?

First, you have to do is separate on the Columbia piece with it. We think that we'll probably lose in the next quarter about another $4 million to $5 million on Columbia. And we expect that -- we hope by the end of the year to have that positive, but that's going to be impacted by what happens with the whole economy and sales in the category. When you separate from there, we expect to have -- we expect FX to continue positive with the business. We do see that -- we really don't anticipate a significant change in the environment that's going on in total.

On the other hand, we see some positive things going on such as the industry weakens in Europe historically the cost of the product -- of the raw material that we buy tends to weaken, too, and they tend to go down with it. We're working on controllable cost pieces and keeping them in line with the business as we go through. So as you look at the whole thing, we think that we're going to have a good year, but the margins will be down from this year.

Thank you much.

You're welcome.

Last year.

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

Hello, David.

I guess I'm hoping to get from you some sense of the run rate of cost savings if you think about the plant closings and idled lines and headcount reductions, where are we right now in terms of a run rate on cost savings?

We don't have that number to give you. There are tremendous amount of cost savings going on in every part of the business. We have -- I mean, since the slowdown started, we've closed over 10 facilities. We have shut down numerous number of lines. We've moved production between different ones. We've continued to invest in improving our productivity and costs as we go through.

Could you hazard a guess in terms of orders of magnitude?

The problem is, I don't have the number in front of me, and each division has their own piece, and they're going through it, and you have offsetting the positives, you have negative variances that are going on in the different places, as well as the costs associated with moving the product and pieces around. So I can't give you a number at this point.

Okay. Maybe I can follow up with you afterwards. Just as a follow-up, a lot of talk about pricing. And I'm just wondering where within your mix of products do you feel you have the greatest pricing power today, and where do you feel you may have the greatest challenge in terms of getting any relief on the pass-through?

As with anything, the more differentiated and unique and the stronger the brand, the more power you have of controlling the prices. And at the other extreme, the more commoditized it is, the less value the brands have, the less you have because customers can move from one to the other. It's typical across all the businesses. If you look at the segment, what you have is the strategies are different. The Unilin strategy has been to participate in the flooring business and the premium parts of the marketplace with differentiation, and they have a very minimal amount of commodity business in flooring. On the other hand, at the other extreme, you have the Mohawk segment which participates heavily in the commodity category as well as the premium one. And then you have Dal-Tile that falls somewhere between the two.

Okay, great. Thanks very much.

Your next question comes from the line of David Goldberg with UBS.

Thanks. Good afternoon. I was wondering if you guys could give us an idea in terms of the price increases that you've done so far, and what you expect through second quarter, what's the differential kind of year to date on how much your raw material input costs are up versus what you've been able to put through in prices? I guess kind of specifically for the Mohawk segment.

For the Mohawk segment, we think we're going to probably realize about a 4% price increase from the last one when it gets fully implemented in it. It will take through the second quarter. The cost increases I can't give you. We thought it was going to cover it. The question is, given oil prices and chemical prices, we're evaluating daily what's going to happen to them, our future estimates are really poor, if you want to know the truth. I didn't think oil would be $100 and -- where is it today?

$15.

$115 a barrel. And we're reevaluating what we have to do with pricing and how long or how sustainable these levels are. So we haven't decided what to do next at this minute.

I guess the follow-up to that would be how long of a lag between changes in the spot price for oil, let's say, does it take to hit your -- to flow through to you guys in terms of higher raw material costs? Is there a lag there at all?

There is and we've gone back and looked at it. If you look at our history where it is, there's not a model that matches it, because you have between us and the oil well you have various pieces in between, and the prices don't come through exactly the same. Each one of the raw materials that we buy has a different supply and demand structure at any moment in time, and for periods of time they can run opposite directions and for other ones -- ours actually lead at some points in time. It all depends on how the channel, the whole thing is flowing through to us, so there's no exact answer to them.

Okay. Then if I could just get a follow-up to an earlier question that was asked about some of the changes you guys have been making to make some inroads in the commercial segments. If commercial starts to slow more quickly, kind of moving forward, how difficult is it going to be for you to change some of the costs that you've moved over to concentrate more on the commercial end user, either back to residential or to eliminate those costs altogether?

We will have to go through the same process we're going on residential, which will mean you'll have to evaluate all your SG&A costs, where you're putting them. You'll to have decide do you want to maintain them for some period of time or do you want to get rid of them quickly. You have to look at the manufacturing assets and decide how to align the production capacities with the demands at that moment in time. And you have to start reducing them and there's a large portion of them that go up and down in proportion to the -- that you can cut in proportion to the business. On the other hand you have to make sure and keep the strength of the business, which is the people that make the whole thing work, and then you have all the overhead pieces which the investments are here, and they don't change as the volume goes down. So I think that we can react to the reasonably so that it will have an effect.

Okay. Thanks a lot.

You're welcome.

Your next question comes from Laura Champine with Morgan Keegan & Company.

Good morning. Could you talk a little bit about what drove the inventories up? I think we were looking for a reduction there. And just be interested to hear what the breakout is there that drove that increase.

First thing to remember is you have to pull out, if you're comparing it year-over-year to first quarter to first quarter, you have to pull out the $50 million that we had in there from Columbia this year that we didn't have last year. And then secondly, there's always a seasonal increase in inventory from the end of the fourth quarter to the end of the first quarter.

The raw material prices went up and impacted. If you look at the turns, the turns went from 4.1 to 4.0. So it changed a little bit, but not significantly. Part of that was the raw material changes. The other part was that business was slower than we had anticipated.

Okay. And then just housekeeping, do you still think CapEx will be basically in line with D&A at around $325 million for the year?

In this environment, I think that was the number we started with, but in this environment we're looking at something, Laura, along the lines of $225 million.

And then what projects are getting cut to save you $100 million or so in CapEx?

We didn't cut them out. The question is there are strategic projects that we have that we can potentially do such as putting in a new ceramic plant, putting in additional capacity in laminate and different -- to support our business in different places. So there's some major capital projects that haven't been turned loose at this point that we're watching, and it could even be acquisitions that we're going to do, and none of those are included in the $225 million. The $225 million is basically to support, A, the maintenance pieces, money spent on cost and productivity improvements, the two major projects that are moving forward at the moment, there's a U.S. laminate expansion that we've talked about, the money is spent going in as we speak. And there is new extrusion capacity being put in that in the shorter term will replace older capacity that we have that's higher cost, and longer term will give us more flexibility and better position in the marketplace.

Got it. Thank you.

You're welcome.

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

First question, I was hoping to get a little bit more of a breakdown on the Unilin segment. You had mentioned that sales were up in U.S. laminate and European roofing but down in other parts. And I was wondering if you could just give us a rough idea, were the U.S. laminate sales up low-single digit, mid-single digits? Also maybe put some rough framework around European roofing and European flooring?

We have hundreds of products in each of the different pieces, and there's a lot of different categories, and we don't break them out. The U.S. business is up limited, and the roofing business is more stable as a business in total, because when people need their roofs. As the structures deteriorate, they have to replace the roofs, so it's been more stable, and the rest of it is pressure on all of them. And the U.S. business there's going to continue to be more pressure on.

So you're thinking more just like the growth was relatively modest in the U.S. laminate, more flattish in European roofing and maybe that would imply that maybe down double-digit in European flooring if the total sales were down 6%?

That's a lot of assumptions you made. You're welcome to make them.

I was just working off of what you said.

We don't give out individual product volume.

Okay. Also, just there's been a couple questions about margins. And I was just trying to get a sense for -- you're finally starting to see -- there was an upside to the Unilin margins last year. Excluding Columbia, I guess your margins are down about 300 bips, and maybe some of that is due to the core sales being down on an organic ex-currency basis. But I was wondering if you could give us a sense for if there were some either plant start-up costs, or if there's a product mix shift that you had been assuming would occur and be a negative impact on margins, or what are the primary drivers there?

As we said before, I mean, there are some costs related to the start-up of the new plant in the U.S. There is pressure on the -- some of the building product business in Europe. The building products business is under significant pressure. There's been pricing pressure on it this year, where last year it was at the market was doing really well, and you were able to push through price increases and maximize margins. On the other side of that at this moment, which is typical of what goes on. So this year, I mean, the margins we expect them to be better than the first quarter as we go through it, but they will not be up to the level of they were last year as we go through.

The only thing I would add to that, Mike, we calculate the margins without Columbia maybe being down a little bit over 200 basis points, 210, 220, somewhere around there.

Okay, great. One last question, if I may. Just thinking again about pricing, but now I'm thinking from the carpet, Mohawk segment. I think the question had been asked before about ability to pass through price in a softer environment, and your response was more just it's product by product, excuse me, it's the ability to leverage or pass through on unique products or products that you have a good position in. But on a more macro conceptual basis, do you -- as you model things over the next year or two, do you expect the same ability to pass through higher raw material prices as the demand continues to be very challenged and potentially promotional activity and such might increase?

In the general marketplace, as the raw materials go up, we increase the prices to reflect those material costs as an industry. Now, offsetting those in the down time you have more promotion, you have people taking business and categories at lower margins which is why the margins are down, at lower margins than we would have under normal circumstances. And so those two things is the balancing act that we -- that the industry keeps going through. Given the margins where they are, I wish we all had more discipline than we actually have at this second, but all things considered it's not bad. This year we believe is going to continue being a difficult environment, which we've said, and so far every time anyone in the industry has led a price increase, the entire industry has followed.

Okay. One last question, if I could. I'm sorry to throw this one in. Do you have a sense for the negative impact on margins from running your plants at a lower rate this quarter due to, as you had said from the fourth, the lower inventory build by retailers?

Our financial group has it, but I don't have it here, and basically I'm not sure I'm prepared to give it to you if I had it.

Okay. Thanks a lot, guys.

Okay. Thank you.

Your next question comes from Eric Bosshard with Cleveland Research.

Good morning. First of all can you -- Frank, you commented on cash flow in the year. I wanted to understand You've historically generated $50 million or $100 million in cash from operations in the first quarter and I think you used that amount this quarter. Can you explain why continues consumed cash rather than generated cash in the first quarter?

Eric, like I said before, it was primarily timing related to receivables and payables. With receivables being affect by a shift in the calendar between Q4 and Q1, and then also some timing issues related to dealer shows and related product roll-outs, and then in the payables area, as we moved to internalize more of our source product that had an impact on our DPOs. And those were the two things that primarily impacted cash flow.

So for the year you said that cash flow should be positive for the year, does that mean --

Correct.

I just want to understand what that means. That means the cash from operations for the full year will be up from what was generated a year ago?

Correct.

Okay.

What I meant, positive for the year, free cash flow would be positive for the year.

Okay. Right. It's always really positive for the year.

From the beginning of the year to the end of the year.

Right. But I guess just to get a little more perspective is that, the cash from operations is going to be then down from where it was a year ago by a meaningful amount? You've always generated --

What we're addressing right now is just free cash flow, Eric. And we think it's going to be positive for the year.

And we anticipate the earnings being down. That's going to pull the cash flow down.

I mean just -- I mean you've generated hundreds and hundreds of millions of dollars of free cash flow in prior years. Can you give us any range other than saying it will be positive?

It kind of gets back to our inability to go out and give you guidance beyond a quarter out because we have limited visibility beyond a quarter. And so it's a little bit of the same issue.

I guess last point on this. The timing did not reverse itself in 2Q. It sort of showed up in 4Q instead. Is that correct?

The real issue there, if you looked at the last day of December '07 ended on a Monday, of this past year, so what happened was the cash from that weekend preceding that Monday and the Monday cash ended up in Q4 instead of Q1.

Okay. So we're not going to see a -- so 2Q will not have a big benefit in cash from operations from this change?

No, it was a shift between Q4 and Q1.

Okay. Great. My second question, whoever is the perfect person to answer it, when you think about the Unilin revenue momentum and the Dal-Tile segment revenue momentum in light of your comments about Europe and commercial trends, is it safe to say that the revenue performance, and you've given the earnings performance, but the revenue performance trend that we saw in 1Q relative to 4Q, that's kind of where things go as we work our way through the year with those two, kind of ongoing headwinds, we should not expect a revenue reversal and if anything perhaps I guess it makes logical sense that the revenues remain under pressure if not incremental pressure? How do you think about those things?

We have a very limited forward view of our orders, because we ship them relatively quickly from the customer. So basically we look at the high level economic pieces and make our internal estimates of what's going to happen over the next quarter or two. And with those, we don't see anything that's going to change the present economic direction that we see, and so we're still wary of what's going on, and we're projecting forward more of the same from a revenue standpoint.

Okay. Very good. Thank you.

Your next question comes from John Baugh with Stifel Nicolaus.

Good morning, Jeff and Frank. Good. You announced agreements with the four Chinese laminate players in settling some litigation with another. Any color on how meaningful that is?

Those are part of what goes on with the IP process and licenses, and within that, as you see, we go through a lot of things which include legal pieces as well, in order to get people not to utilize our licenses without paying for them. And in that case what you had is, when we -- we're able to stop all imports coming in that weren't licensed properly, they were caught in that, and anyone who chose to participate in the marketplace had to sign a license agreement with us. And those were some that came to an agreement and agreed to pay us on the sales they have into the U.S.

Had they been -- had they ceased shipments for the last three, four, five months while you've been working this out, or have they been shipping through out this period? Is there any kind of change coming from this decision, or this agreement?

I'm not close enough to tell you exactly what's happened to their specific shipments.

Okay. I assume you're not going to tell me what you are going to offer for full use, so we'll skip that question. Back on this working capital issue, Frank, if your revenues are down, I don't know, $400 million for the year, your working capital has usually been about 20% of $1 revenue in address or decrease. That would imply a source of $40 million. The question is how much of this inventory that's coming in-house, if you will, it sounds like a permanent change, going to influence that number if you made that revenue assumption? Because I'm assuming the receivables were just timing will reverse a little bit. Maybe not this calendar year but beyond.

I think the working capital thing was either timing or one-time related. Then once we got it behind us, we got it behind us.

So the expectation, nothing has really changed. If we had a $400 million reduction in revenues, we should see roughly $40 million source from working capital?

I think the only caveat is that like we said about first quarter inventories, business declines, and you're running to catch up with your inventories, right? You keep your inventories in line. So that's the only caveat.

The raw material inflation and how it impacts those.

Okay. And I calculated the loss at Columbia about $10 million. So you're running bigger losses than you thought. Is that simply due to volume?

Stop. You calculated the loss wrong.

All right. I calculate 2.5% margin differential, but then the Unilin segment, 14.9% was it you gave out versus 12.4%?

More like $5 million.

The loss is $4 million to $5 million.

In the current quarter.

Correct.

Okay.

And we're expecting it to be $4 million to $5 million in the next quarter and continuing to decline.

Okay, super. Sorry for the error. Thank you.

Okay.

Your next question comes from Carl Reichardt with Wachovia.

Morning, guys. On that line of Columbia, I'm sorry, this may be a prosaic question, but what specifically do you need to do to return it to profitability? Is it a capacity -- a fill-in capacity issue, a cut cost issue? What do you need to do?

Well, we think we're doing those things as we started. First is that, we're improving the productivity of the plant, and quality coming out of the plant. We've dramatically improved the productivity of the plant, we have streamlined operations, we're taking out redundant overhead, we're taking out SG&A costs on one side. On the other side, we are introducing new products into the marketplace which will start going in, in the second and third quarter of higher quality, more design-oriented pieces which will give us a higher average unit price. We're continuing to try to move import products into the plant that we were purchasing outside, and then we are continuing to increase the automation of the plant to reduce the cost even further as we go through, and we've approved certain investments over the next few months to do that in addition. The combination of all these things we expect by the end of the year to be a low-cost producer, high quality provider, of a broad total line of wood, and then what we need is the industry to pick up, and we think that it can be a good money making proposition for us.

Okay. Thanks for the color, Jeff. And then looking at your experience through other cycles historically, when you've seen a turn, let's go to the early '90s, in business, especially residential remodel, the driver as you said earlier, is there a difference in performance between premium products versus more commoditized products? Do you expect the premium side to show a significant pickup in order activity before commodity products? Is that your sign of improvement?

When you look at residential, what typically happens is that the remodeling business tends to use a higher quality product than the new construction business, on average. So that is the portion that tends to pick up first, and the consumer who is picking it out for their existing home they're in, tends to put better quality products in it than the builder would put in. So with that you tend to get a better mix as you come out of it.

Next question, I want to make sure I understand your response to Eric. You expect to be cash flow from operations and free cash flow positive in Q2?

The only thing we're addressing is free cash flow for the year, from January 1st through December 31st.

Okay, so you're not commenting on Q2.

Correct.

Okay. Thanks, guys.

You're welcome.

Your next question comes from Dennis McGill with Zelman & Associates.

Good morning. I was hoping you guys could just elaborate a little bit on the absolute growth rate you're seeing in the major end channels, whether it's new residential, home improvement spending, and then the commercial side.

The new construction business -- we're all looking at the same numbers of the new houses going up, being about half of where they were at the peak. So we believe that that's going to represent what goes on in that channel. The remodeling part of the business is the one that's difficult to anticipate at the moment given the squeeze in the discretionary income of the average person, we believe that the increased spending on food, on transportation, on healthcare, is squeezing the income, and that's creating a significant reduction in discretionary expenditures, which is why the remodeling business is doing so poorly. In addition, there's a portion of the remodeling business that is related to the existing home sales. So as you -- existing home sales go up, and people start buying more homes, that will create more remodeling pieces. And again, the reason we don't give long-term numbers is because our ability to guess those things is not much greater than yours.

No, I was more concerned with what you're seeing right now, backwards looking.

Well, the industry numbers I believe showed a carpet -- the carpet industry showed about a 10% decrease in units in the first quarter. The ceramic numbers I believe were off 15% to 20%, but I don't know which numbers I'm remembering from which point it is.

Maybe I could clarify. I'm not sure how you guys look it at internally, but I'm just trying to understand within your end channels, looking at your customer base, if there's -- essential I'd like to get at the home improvement spending, the repair and remodel spending, both the residential and the commercial side, as far as what you're seeing right now for those growth rates or contraction.

The commercial rates were up, and we believe they'll continue to be for a period of time.

And that's a low single-digit increase?

We've really not disclosed that information separately in the past.

Okay.

The piece in between, the new construction off a cliff, then the remodeling is somewhere between the two.

Any more specific magnitude on the remodeling?

I don't have it to give you in front of me. In each of the divisions, it's different, too. It's different between divisions, different pieces. We don't collect them all together in that piece. We look at it by segment.

Okay. And just to make sure I got the comment you made earlier, at would point do you expect the Columbia assets to return to break even?

Our goal is to have them break even in the last quarter, and the big question is what's going to happen to the volume, is the only unpredictable piece. We are headed quickly to improving the cost per unit and the quality and the broadening of the product line. The only question we can't answer is what's going to happen to industry volume.

Okay. Very good. Then just my last question, on your builder customers, your days outstanding similar to what you reported at the corporate level, staying in that tight range?

First, we don't sell directly to builders. We sell to contractors. We aren't able to break out our receivables because we sell to customers that sell into both the remodel and the new construction channel so we can't break that out separately. But overall I'll repeat again that our age accounts receivable is in good shape.

Okay. Alright. Well, thank you, guys.

Thank you.

Your next question comes from Kevin -- I'm sorry, Keith Hughes with SunTrust.

My question has been answered. Thank you.

Okay, Keith.

Your next question comes from Meryl Witmer with Eagle Capital.

A quick question on Unilin. You talked about the Columbia operating loss and enumerated that. In the press release you also mentioned the plant start-up expenses, and imports costing more. And I guess I was wondering if you could give us sort of range on the plant start-up. And then also I guess you said you're going to start producing some stuff here in the U.S., so maybe if there are any changes, what sort of delta we might see.

We're looking to see if we have it here. The start-up cost in the quarter was about $1 million to $2 million, and I don't have what it's going to be in the second quarter, but it's probably going to be of that magnitude or greater.

Okay. And is that from starting up something with Columbia?

No, that's the starting up of the new laminate flooring plant in the United States.

Oh, okay. And then you also the -- you mentioned imports, with the higher cost U.S. imports. Is that something that will change when the plant is up and running?

Yes. What's happening is we have a -- we import material made in our European plant to our Unilin U.S. operation, and those shipments are all impacted by the euro, and then the U.S. manufacturing plant will be able to produce those on a landed basis cheaper than we can import them from Europe. And they will also have a positive effect on the working capital because you have time it takes to move it from one to the other in addition. In addition to that as you put more capacity in the U.S. facility, the facility was built to house this capacity from day one. So as you increase the unit throughput through the plant all the costs of the plant will be positively affected.

And then I guess you have an off -- well, one, I don't know if you even can get a sense of how much that will save at that sort of current unit volumes, but if you could take a stab at it. Is it in that $1 million to $2 million a quarter range, like the plant start-up expense, or would the savings be dramatically more?

I don't have that to give you. It's a moving target, too. A lot of it depends on what the volume is at a given moment in time.

Okay. And then I'm just wondering -- I don't know if you have the data there, but in the Mohawk division is there a way to look at sort of unit volume that was sold in, say, the year 2003?

Could you repeat the question?

I'm just -- I'm looking -- well, I'll give you a little -- I'm looking at Mohawk. Back in 2003, which was not a real robust year relative to -- I'm sorry, it might be '04. You made $364 million in operating income in the Mohawk division. And I'm just wondering how that unit volume compares to the unit volume now, '04 versus '07 or any --

I'm trying to recall. I think that the industry in units from the peak, which would have been 2005, is running about 20% off in units, and that there's an expectation that this year will be off another 5% to 10%. So from the peak period could it be off 25% to 30% this year versus two years ago. And each of the different divisions have different numbers. We believe that the wood industry is off more than carpet in units because it has a higher portion going into new home construction. We believe ceramic has less, and we believe that the laminate business is off less because it had almost none in new construction at all, and it's probably still gaining a little share. So each one of the categories is different.

Your next question comes from the line of Arnold Brief with Goldsmith & Harris.

You've talked about -- around it a little bit, but I'm just wondering whether you could sort of sum up and give us a little better feel for what you feel your market share trends have been by the three major operations in the last couple of years and currently, and maybe some perspective on whether you see -- whether it becomes easier for you to increase market share in periods of industry declines versus industry growth? And then the second question is, I would imagine in this period of time, a number of your competitors, particular some niche competitors, may have become more financially challenged. I'm not asking are you negotiating with anybody. I'm just wondering, if the opportunities seem to be increasing for acquisition exploration.

That's a lot of questions. The market share pieces, we believe that we've been gaining share in our Unilin segment and our Dal-Tile segment. We believe that in our Mohawk segment, a little too aggressive in cost reductions last year and the timing of some of the pieces, and in some instances we lost some sales opportunities, and we're taking actions to correct those. What was the second part of the question?

Acquisition opportunities in light of the -- and whether or not it's easier in general to increase share during the periods of down turns versus upturns and acquisition opportunities.

Okay. On the acquisition side, typically in down turns, the only people who try to sell the businesses are the ones that don't have any choice. So in the worst part of it, companies tend to not want to sell because the values are the least. And the only ones that sell are ones that have cash flow problems that don't have too many options. As you come out of the cycle where they tend to need more cash to support the growth coming out and their future visibility looks more positive there tends to be more deals coming out of the structure than you do in the middle of it.

With that we've continuously talked to a number of different candidates at all points in time, and in many cases, it doesn't happen overnight, and you look for various options and in some cases they'll come through, in some they won't. We believe there will be opportunities to buy businesses over the next period of time. And I don't know whether it will be at what moment, but we think there are some very good companies that will come for sale, and we would like to purchase them when they make sense and they have the right values, and that we can add value to them. Did I miss any of the pieces?

I think you covered it all.

At this time that does reach the allotted time for questions. Mr. Lorberbaum, do you have any closing remarks?

I'd like to thank everyone for joining us. I believe our team is performing well and managing through this downturn. Our management group has been through this before, and they're making significant improvements in all areas that I believe will produce numerous benefits to our business as we go forward. Thank you very much, and have a nice day.

Thank you. That does conclude today's conference call. You may now disconnect.