莫霍克工業集團 (MHK) 2008 Q2 法說會逐字稿

Good morning. My name is Jody and I will be your conference operator today. At this time, I would like to welcome everyone to the Mohawk Industries second quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the 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, July 22nd, 2008. Thank you. I would now like to introduce Jeff Lorberbaum, President and CEO. Mr. Lorberbaum, please begin.

Good morning, and thank you for joining the Mohawk second quarter conference call. With me, I have Frank Boykin, our CFO. We appreciate your interest in Mohawk and review the current environment, the 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. You can refer to our press release for a reconciliation of any non-GAAP to GAAP amounts. Jeff?

Thank you. Our results for the second quarter were impacted by the slowing economies in the US and Europe and rapidly increasing commodity cost. Second quarter net income was $89 million and diluted earnings per share was $1.29. Net sales for the quarter were $1.8 billion, reflecting a decline of 7% from 2007. During the quarter, our cash flow from operations was $267 million, and we paid $183 million of our debt. Our debt to capitalization ratio improved to 30% and our debt to EBITDA ratio was 2.3. Declining US home construction and residential remodeling, slowing European demand and rising raw materials and energy cost have contributed to the flooring industry's cyclical decline. The rapidly increasing cost are stress on our margins even as we raise selling prices to offset these costs. All of our management team remains focused on improving our market position, increasing quality, introducing innovative products, and providing excellent customer service. The team is relentlessly pursuing cost controls, working capital management, and process improvement to manage through the cycle. We believe all of these efforts will better position our company when the market improves. Frank, would you review the financial information please?

Sure. I'd be glad to. Starting with the income statement, as Jeff has said, our net sales came $1.840 billion, or about 7% below last year. All segments are down on a constant exchange rate basis, and if we exclude acquisitions, due to the declining US and European economies. Our gross profit was impacted by lower volumes and higher raw material energy cost, and at 26.2% of net sales were about 200 basis points less than last year. SG&A expenses came in at $337 million, which is an improvement over last year by $21 million as reported, or if you look at it on a constant exchange rate basis, it was actually $28 million better than last year. We continue to emphasize cost savings and reductions in this area, but are impacted by lower leverage with lower sales.

Interest and other expense -- interest came in at $33 million lower due to lower debt levels as we paid down our debt from strong cash flow. And other expense and income was less favorable due to the impact of foreign exchange. Income taxes -- the rate for income taxes for the quarter was 20.5%. That compares to 28.8% last year, improved over last year as a result of the tax planning we put in place late last year. We were also impacted this year on our tax rate as earnings in Europe were lower, and we have a fixed amount for permanent tax deductions, which, with the combination of those two things, gives you a lower effective tax rate. We expect our tax rate going forward for the rest of this year to be in the 20% to 21% range. Our earnings per share at $1.29 were 23% below last year.

Moving to segment information, the Mohawk [segment] sales were $968 million or 13% below last year. This segment was most impacted by the US residential decline. Operating income in this segment was 3.6% of net sales with margins being squeezed by lower volumes and rapidly increasing raw material cost. Our Dal-Tile segment sales at $482 million were 5% below last year, but they continue to outperform the industry even with a decline in sales. Operating income came in at 12.1% for the Dal-Tile segment, and they were most impacted by higher energy and freight cost during the quarter. The Unilin segment sales at $412 million were 13% better than last year. If you look at sales based on a constant exchange rate basis and excluding the Columbia Wood acquisition from last year, sales would have declined by 7%. We saw declines both in our European businesses and our US businesses with sales. Operating income was 14.6% of net sales, with operating margin excluding the Columbia acquisition which we had a loss on during the quarter of $5 million, coming in at 17.2%. Foreign exchange favorably impacted our operating income by $8 million for the quarter. In the corporate and elimination segment, the operating income loss was $7 million for the quarter and we expect to run about $30 million for the full year.

Jumping to the balance sheet and looking at receivables, they ended the quarter at $982 million. Our days sales outstanding in receivables for the quarter were a little bit over 45.5 days, compared to 44 days last year. The increase in days was impacted primarily by channel mix with our aging -- our account receivable aging still in good shape. Inventories ended the quarter at $1.250 billion with our turns coming in at 3.9 times for the quarter compared to 4.1 times last year. We did generate cash, with inventories decreasing $45 million from the end of the first quarter to the end of the second quarter. And also included in our inventories at the end of the second quarter of this year is about $50 million related to the Columbia acquisition that we did not have in last year. Inventories were impacted by raw material inflation, by buying ahead of the price increases and also declining demand.

Under fixed assets, we spent $50 million of capital expenditures, and that compares to $75 million in depreciation and amortization. We continue to estimate CapEx for the year between $225 million to $250 million with depreciation and amortization expected to come in at about $300 million for the full year. If you look at long-term debt, we ended up at $2.1 billion with long-term debt. We paid down $183 million of debt during the quarter, improving our debt to capitalization ratio to 30% and our debt to EBITDA ratio at 2.3 times. Jeff?

Thank you. The environment in the second quarter continued to deteriorate in all our segments with declining demand and cost increases reducing margin. Price increases, cost cutting and process improvements are the focal point of all our business segments. The Mohawk segment performance is under pressure, with sales declining 13%. Both the residential remodeling and new construction have deteriorated and show no short-term indication of improving. The commercial and rug products are performing better, while the hard surface and cushion products are declining more than residential. We see customers in all product categories trading down in quality as their budgets have been constrained by rising food, gas and healthcare cost.

During the second quarter, we announced two carpet price increases -- one in June and one in July for a combined increase of about 10%. The increases will be implemented through the third and fourth quarters, but are lagging the cost changes. Higher energy, materials and freight cost are causing dramatic cost inflation. Many of our raw materials are going up 30% to 50% from the first of the year. Polyester is increasing less than nylon and polypropylene, making it a better value for the consumer. The major focus of residential is on the retail replacement category through independent dealers, home centers, and multifamily. In both the home center multifamily channels, we received additional commitments which have helped us in the fall. Our mid season product launches are getting into the stores and will satisfy specific style and performance needs as well as fill some value positions which have been vacated.

In the Mohawk wood, we launched the first phase of our new product direction, focused on the medium to high end, with a visual -- with differentiated visuals. We'll begin the second phase of the introduction in the third quarter.

Our commercial products continue stronger than residential, but we are anticipating them slowing in the future. Our new brand strategy of four brands aimed at distinct markets with different value propositions and sales focus has been executed. We are increasing our commercial carpet tile offering with new value, performance, and stylized tile options. We also introduced carpet tile in our mainstream channel, which has not specified by project. We introduced a new hospitality product called Synthesis, which is expanding the use of printed carpet from Durkin into hotel areas historically using other products. We continue to invest in our Greenworks environmental initiatives, which have been well accepted by our customers.

Mohawk flooring has many initiatives to improve productivity, material yield, quality and service. Controllable direct labor and material yields are favorable compared to last year. Many process improvements have been executed, improving cost and quality. New supply chain systems are being implemented, and next year we'll improve service, working capital, and productivity. Reductions in our infrastructure have been made to balance cost with business conditions. All new capital investments in the category are focused on cost and quality improvement. Dal-Tile sales are down 5% during the quarter and are doing well for this difficult environment. The US commercial and Mexican sales growth continue to buffer the impact of the declining US residential industry. Our new direct ceramic collection is providing an alternative for large customers for importing ceramic in bulk today.

With large commercial accounts, we are expanding the specification of our products and increasing our penetration. Most of our new product introductions are focused on commercial end uses. New product placement in home centers will improve our share in the channel in the fall. We are producing exact size rectified tiles that will broaden our ceramic offering and strengthen our position.

We opened three new service centers in the west where we believe we have opportunities to grow. In July we purchased a stone center in North Carolina to expand our national presence in stone. The major factors affecting Dal-Tile's margins are rapidly rising energy, and increasing freight cost, along with consumers trading down in quality, with increased product prices and energy surcharges in the second quarter to help offset the rising cost. Given the cost changes that are occurring, it may be necessary to increase ceramic prices again in the third quarter. Manufacturing is operating well, and we are producing many products that were previously sourced externally. Many cost initiatives are being executed to improve labor productivity, control expenses and reduce energy consumption. Freight costs are being reduced by utilizing lower cost transportation modes, increasing weight per load and more direct shipment. By the end of the year, new systems to enhance our local service centers will be tested and ready to implement across the business to improve service levels, productivity, and inventory turns in the local service centers. We are improving the use of working capital and reducing our inventory. In the third period, higher cost and lower volume are expected to continue pressure on margin.

Unilin sales as reported were up 13% over last year and down 7% on a [cut and] exchange rate basis excluding the Columbia acquisition. The last couple of years, Unilin has had extraordinary results, with last year at an all time high. We've indicated as we went along that we didn't believe that these results were sustainable over the long term. Sales declines were experienced in the US and much of Western Europe with Russia and Eastern Europe continuing growth. Laminate sales in Europe were weakest in the UK and the Spain. Our premium positioning of laminate in Europe is holding up better than the overall market. Our laminate MDF core sales and pricing are down, reflecting a slow market and additional new capacity which has come into the European market. Our IP revenue has also fallen along with the industry's volumes. Oil based materials and energy inflation continue to increase the cost of most of our products in this category also. A 5% to 6% price increase is being implemented in the US laminate business during the third quarter. The new laminate capacity in the US will be operating in the third quarter and will reduce the cost of our higher end product presently imported from Europe.

In our roofing and other wood products, roofing has maintained its performance while our other wood products are down with the slowing European construction, cabinet, and furniture markets. Our external sales to these markets and other manufacturers were at cyclical high pricing and volume levels in 2007 and are headed toward cyclical lows. In the third quarter we anticipate continued slow demand and additional plant shutdowns in Europe, affecting overhead absorption and increasing our cost. Unilin has many initiatives to lower cost, modify processes and materials, as well as reduce energy consumption. The wood business, as Frank said, lost $5 million in the second quarter due to lower industry volume and customers reducing inventory, anticipating new products being launched. Higher sales of distressed inventory were incurred as a result of the product line repositioning we are doing in both the Mohawk and Columbia brand. The wood flooring operations have made significant improvements in manufacturing processes and material yields, reducing labor and improving quality. We've implemented new information systems and internalized outside wood purchases so far, but the negative overhead absorption is increasing cost. We expect our new product strategy will improve both our wood sales and our product mix.

In the third quarter, the outlook remains challenging, given the difficult business environment. Slow demand and higher materials and higher energy cost will continue to compress our margins. As a result, we are raising product prices and transportation fees on most products, but continue to lag the increases in cost. We'll adapt our strategy to a continuously changing environment. Based on these factors our guidance for the third quarter 2008 is $1.06 to $1.15. We have many focused initiatives underway to reduce cost, maximize working capital, improve service, and bring new products to the market. We remain convinced that Mohawk will be stronger as we come out of this cycle. With that, we'll be glad to take any questions.

(OPERATOR INSTRUCTIONS) Your first question comes from the line of Sam Darkatsh with Raymond James.

Can you hear me okay?

Hi Sam. How are you?

How are you? First off, Frank you mentioned that the tax rate -- a housekeeping question, 20% to 21% -- was that for the whole year or was that for the second half of your expectations of the tax rate?

Second half.

Thank you. And Jeff, I guess you and I talked a little about this at [Niacon] a little bit. At what point do you look at the pricing structure of how you go to market, and maybe look more towards a variable pricing method -- either including surcharges or some sort of index pricing methodology to make it easier for you to continue to pass along the dramatic inflation that you are seeing? Are we anywhere near there, or are there issues with that that make it very difficult to do so?

The issues that make it difficult are that our customers are not used to variable pricing and that if they make a sale, they would like to know what their cost is going to be. And if you go to a variable structure, it will change constantly. And so we think that it's difficult to move the industry to that, but if it keeps changing, it may have to be a consideration over time.

And then finally you mentioned that the commercial end markets are a little bit better -- considerably better that the residential markets, but you anticipate them to slow. Are you seeing them moderate at present or is that an expectation that you are hearing either from the field or based on macroeconomic indicators that you follow?

What's happening is there are less projects being brought up. We perceive there is some slowing. We believe that we have built into our forecast that they are going to slow in the second half in it. They continue to perform much better than the residential, but given the environment and the different pieces going on with the economy and businesses, our assumptions are they are going to slow.

Thanks much.

You're welcome.

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

Actually Ray Huang on for Mike.

Good morning, Ray.

Good morning. Wondering if you could give color on the US laminate facility. Can you give -- in the press release, you guys mentioned that there's currently some higher end product being imported from Europe. But I wonder if you can quantify how much that represents out of Unilin and also what -- if you can quantify any cost savings associated with this?

As a duty to change, the importing of product continues to increase. The new equipment that we have installed is more sophisticated and can do looks that we can only do historically in Europe. In making the change, you end up with freight and duty changes as you go through. You eliminate the currency impact. It will improve the overhead absorption in the US market, though it will negatively affect it in the European market as we move it. And then it also offers opportunity to remove some working capital due to the time it's on the water and reduce that. The capacity that we put in is about 100 million square feet of new capacity in the plants, which we believe will also help us provide additional product as the business grows in the future.

Okay. That's helpful. Would that be in the ballpark 100 basis points improvement? 200 basis point improvement?

It's only a limited portion -- I don't have the number in front of us, but it's only a limited portion of the total business and it will not move the margin dramatically across our entire business.

And then on the sales growth in the second quarter, I wonder if you can give a breakout of how much of that growth was due to the price and how much was due to volume by segment?

Well, no growth due to volume for the most part.

Decline.

We don't really have that information right here in front of us.

If you want to call Frank, he'll get it for you afterwards.

Okay. Thank you.

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

Good morning, Jeff.

Hey, David.

First of all, how is the mix of distributed product versus manufactured product changing? You mentioned, Jeff, in your prepared remarks that you were bringing more products into your manufacturing. I sense that maybe the distributed portion is declining. Can you help us understand maybe how that has changed over the last few quarters?

The comment was related to Dal-Tile, and Dal-Tile historically -- we have had as much as 35% or more of the product we sell -- of the ceramic product that we sell imported, and supplied by outside sources. As the volume and the industry has slowed down, we've reduced that to 20% or less, and what is left is basically looks that are differentiated that either we choose not to make or they take very specialized production to make them.

Is that more high differentiated low turn type of product?

Correct. They are much more -- they are at the extreme end of the product differentiation in the ceramic business, and we fill in our product line using those.

That's helpful. The other question is thinking about fourth quarter and you've laid out third quarter guidance for us which we appreciate, but how can things get better in the fourth quarter at this stage? Or should we think of the fourth quarter as looking a lot like the third quarter at this point?

Our crystal ball doesn't work any better than yours. There are things that are impacted -- dependent on the assumptions. And let me start with I guess the assumption in the third quarter, which is first we've assumed that the demand in the US market is going to continue to be under pressure and will be lower than -- will continue lower, that the Europe will continue to be more affected by the US financial problems going on, and that the European market will slow. We've assumed that the US commercial market will start being affected. We've started with the assumption that even though energy and oil prices have declined in the last couple of weeks, that they are going to continue to be very high and that energy costs are going to remain at high levels. We've assumed that the raw material prices are still behind the oil prices, and there's still more oil inflation that will come to raw materials during the third quarter as we go forward. And with this, the raw materials -- they'll continue their inflationary rise. With these things the results is that the business will have lower production volume as will the industry and impact the absorption and then the price increases will not be executed as fast as the cost increases in the third quarter. With those things, it depends how you make the assumptions on those pieces and you can make dramatic assumptions different on each one of those looking forward than we did. So if you believe that oil is at a high and it will drop to $100 you get a different answer. If you believe it will get to $160, you get a dramatically different answer on both the cost side and on the margin side as we go through. So our assumptions are it will be more of the same in the last half of the year.

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

Could you comment on the year over year change in carpet yardage, because with that segment down 13% in the face of multiple price increases, I'm guessing the yardage is getting hammered. Is that a good assumption?

The volume is down significantly. The industry is down about -- I think about 14% in units, with residential down more and commercial better. So there's a dramatic decline in the unit volume in the industry, and our performance I'm not too proud of with that. We'll be glad to discuss that too.

Right. That leads to the follow-on, which seems you may be losing some share and I'm curious what might drive that.

If you look at the overall business, the Dal-Tile and Unilin we believe are growing share and the Mohawk segment has not performed as well. Just to remind you, we have different product categories under the Mohawk segment, so it's not all one thing. We have rug and commercial products that are doing better than the residential. We have hard surface and padding that have done worse. We've also discontinued the flat woven business that was about $40 million last year, also in the piece. And as we went through the cycle we started making adjustments to our strategy to address what we believed to be product and demand changes that were going to happen, and we aggressively made changes in various parts of the business which have impacted our performance over the short-term, but we think will position us better for the future. And broad categories, we have realigned our sales strategy to create a better focus on individual channels and remove redundancy we have across the business. We've increased the specialization by customer channel. We narrowed the various brands that we used into a more narrow brand focuses, and we've taken out overlap between the different brands, while at the same time we've increased the salesforce segmentation.

The second major piece is we've repositioned and simplified the product line. In doing this, we dropped a significant number of SKUs. We have consolidated the SKUs within it, and to align with the sales strategy we have reduced redundancy between the different brands and sales forces. Behind the scenes we've simplified and reengineered the various components that go into them to make them more effective. And then we have expanded what we believe to be the higher growth product areas which will be polyester, carpet tile, multifamily, and the higher end stylized products are reducing other such as nylon staple and other categories that we believe are reducing.

And finally, we tried to rightsize the cost structure of the business. We aggressively went after headcount in all areas of administration, sales, management. We have increased the discipline in our spending of marketing monies and we have lowered the direct labor as well as manufacturing costs to go along with it in different pieces to try to offset the falling volume in all these things. We put a lot of aggressive changes in place in the most difficult environment history. We believe that they are the right actions for the business, and the combination of executing those things have negatively affected the business in the short-term, but we think long term they will position us for a better business as well as more profitability as we go forward.

Great. Thank you.

Your next question comes from the line of Ivy Zelman with Zelman & Associates.

And with the price increases that you are planning for the back half of the year, it's a necessity given the cost increases. The only issue though is that can negatively impact volume further, and looking at your utilizations rates right now, is it not a possibility that you'll see volume fall off further as the expense of the big ticket item to put a new floor in the home is something that can be postponable and right now consumer are tapped out and discretionary spending seems not to be at the top of the list. So is it possible you will lose share and you will see more volume decline at the expense of getting those price increase? And what do you do if that starts to happen?

The price increases that we are putting through, we believe the entire industry is putting through. Everyone has announced increases. From the feedback we are getting from the marketplace, it sounds like we are all in similar position. The marketplace has moved to a relatively similar position. With the rapid increase in oil based material, anything related to oil is going to go up. We believe it will be about a 10% increase, with the last two increases going into the marketplace. The consumer demand is under great pressure as we know, but we think that the entire category is going to have to move up.

Oh no, Jeff. I appreciate that. Obviously there's little you can do about that. I am not referring that you will lose share versus your competition. I'm sorry if I made it sound that way. What I'm saying is, is it not a risk that the consumer is already feeling the tremendous stress of the weak economy and being very levered that you'll see a further decline in volume? And part of the business the way I understand carpet is that the significant utilization rates that keeps margin at a high enough level, you could see yourselves having to shut down facilities, and you are adding the three new surface centers in the west and you are adding capacity as opposed to shutting down. Would you anticipate that there might be a need to shut down capacity, given volumes might decline in a more recessionary environment for the consumer overall?

We constantly review the capacities and they are different in all parts of the business and each of the segments have different pieces. For the most part, the only capacity that we are adding is in the laminate business which was put in place 1.5 years ago or so. It's coming onstream. The other items we are spending money are all cost based, quality based, innovation based. So we are not adding capacity. Over the past year or so, we have taken out high cost equipment in different places. We've closed some ceramic plants. We've closed some yarn plants. We have taken out some high cost extrusion capacity. We have reduced the distribution assets in the marketplace. The other assets we have cut back on shifts and running them less. We constantly review whether we should take them out permanently, or mothball them. Or if you look at the carpet side, I would guess it's running in the 65% to 70% of capacity with the decreases. The ceramic side is running higher because the decrease in volume has not been as much and at the same time we have been able to bring in outside volume that was sourced from other people. So I think we are doing the right things for the business. Whether we shut down asset permanently, we constantly assess that and we determine if that is the right thing and we take those actions.

Thank you very much.

Your next question comes from the line of Eric Bosshard with Cleveland Research.

Good morning. Two questions for you. First of all, Dal-Tile, how do we think about with slowing commercial, how the margins behave from here -- is the 2Q margin level or the 2Q margin degradation what we should expect going forward or how should we think about the margins lining up in that segment as we move forward?

As I've said in the overview, the biggest things affecting them are the rise in gas prices and the transportation costs are impacting the cost side of the business. The natural gas prices, I won't get it exactly right. The first of the year they were probably around $7 a unit and they are almost doubled. I think about $13 is the most recent prices. The transportation costs, with gasoline and oil continuing to go up, we continue to look for ways to reduce both of those pieces. We are considering a price increase if the market will sustain it. We are looking at that at this point. It hasn't been determined whether to do it or not. We are doing things to try to increase our volume with different channels of business. We are still running at fairly high capacity levels in the ceramic business. So it's a more of a cost driven piece than an absorption driven piece at this point and we continue to try to manage the cost. We have reduced the SG&A cost in the business, the marketing cost and we continue to do those, but the rising in the other two are offsetting the achievements we are making in the other.

The top line sounds like it's expected to ease from the first half level as the commercial demand slows. Is that -- does that present some risk to the utilization rate in the business?

It is, which is one of the reasons we have reduced the margins of the whole business. The anticipation of the piece. It's in there also.

With regard to -- (multiple speakers) can you remind us how the influence of FIFO accounting is having on margins in this type of environment?

Under FIFO, when you get your cost in, they will amortize into the P&L over a period of time depending on inventory turns in the various divisions, and those -- our price increases in the time it takes to fully implement them, always lag the cost increases. There will always be a lag there.

Would the FIFO influence in this type of environment mean that the cost pressure in 3Q would exceed what you saw in 2Q based on how that works? Is that the right way to think about that?

That's all built into our estimate right now. We are going to have timing issues with getting price increases in ahead of cost increases, just like we have in past quarters.

And then lastly in the carpet business where the material cost seems most severe, can you just talk about what you are seeing in terms of trading down in terms of mix from the consumer and is that happening, accelerating, no different? What influence does that have on the input cost pressure?

As you would suspect, the middle part of the market is most affected. The higher end is affected less than that. The lower end -- there is not any place to trade down to. You have the middle part that is the most affected. The customers are trading down in quality with it, and with that we are trying to make sure that we have the right products in the right places at the right prices to satisfy the market as it goes.

Does it offset -- is that an offset the price or is that able to be managed around?

It's impacting margins.

Okay. Very good. Thank you.

Your next question comes from the line of John Baugh with Stifel Nicolaus.

Good morning. Several things. I guess it's irrelevant, but I would assume there would be a huge LIFO reserve if we're still on LIFO. I was curious if you have any feel for what that number would be. Number two, do you have any sense of where you'd hope inventories would be by the end of the year either on inventory turn basis or a dollar amount? And then lastly, on CapEx, I guess your guidance implies you are going to spend more on CapEx in the second half than the first half, and yet clearly business has deteriorated. I'm curious whether you intend to do that or that is a very conservative budget.

A lot of questions there. LIFO, the answer is I don't know what the answer would be, what the reserve would be if we were on LIFO now. I really don't follow that. And then your second question was where inventories will be at the end of the year. We are still working to keep turns in line with where they are right now, but as you can imagine in a declining environment like we're in right now, it's very difficult to keep our production and inventories in line with where the declines are. And in addition to that, we are going to be faced with as Jeff has mentioned continuing raw material inflation. And we will probably be looking at opportunities to buy ahead of cost increases to take advantage of that. So all those will impact our inventories in the second half.

Capital expenditures -- what you see is some of the things we've already committed to aren't fully paid for, which is why the second half looks like it will be more than the other. They are still coming through, and the commitments -- some of them were made last year all the way through or even more than that and those things are coming through as we go through. Most of the capital expenditures are really focused on reducing costs, and in some cases there's some innovative products in various areas that we are investing in that we think will help us a year or two out as we go through. There is also investments going on reducing energy usage. There are investments going on to cut cost across the various pieces. In some cases we have postponed some of them from prior years. As we were focused on reducing leverage in the past couple of years, we postponed some things that we wanted to do. It positioned us well on the cost side. And as the leverage has come down, those things are being spent and it's the right thing to do for the cost of the business.

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

Jeff, I was wondering if you can give us an idea how you think about cash usage moving forward? And maybe walk us through the decision to retire debt this quarter and how you think about that share repurchases in that as you move forward.

Just as a point, the debt that's there -- we have X amount of short-term debt that we can raise and lower. So it's not a permanent -- it didn't change anything permanently. So basically, it was paying off short-term debt. As always, we have the three pieces, which is the internal investment, which this year we are investing -- anything that is going to cut our costs -- the major focus internally are cutting costs and long term things that will help us improve our product innovation. So those are where most of the investments are going. On the other two is acquisitions and stock buyback. We continue to look at acquisitions as well as stock buyback. The question at this moment is that given the credit environment that we are all in is the availability of credit, the cost of credit, and how it impacts our flexibility. And so we are probably more conservative than normal. We still have two things -- we still have acquisitions that we are looking at as well as we are considering stock buybacks. We leave those things open to move different ways at the same time. Again, you have to keep into consideration the credit environment that we are all in.

Great answer. I guess the second thing I wanted to talk about was, Jeff, you mentioned -- one of the previous callers asked about thinking about raw material cost and how you project them going forward. And you talked about your thoughts that energyand oil prices will continue to rise. My question is if oil prices and energy prices went the other direction and they started to decline, how long would it take you guys to realize that benefit and how much of the price increases that you put through so far off a high raw material cost do you think you would have to give back?

Some of it would be felt immediately. A lot of our raw materials and energy change with the rising cost. They are formula based, based on different pieces. So as those things change, they would almost immediately be impacted depending upon which ones, gas and energy, you feel those as they change. The oil prices [do our] raw materials -- there's a lag of those of different amounts as they show up. But they are getting closer and closer together as our suppliers figure out how to pass them through faster. But I mean the impact would be significant and it would happen in a reasonably short period of time. The industry use of those -- how much of it we can hold on to would depend on the industry's reaction to those and whether they try to hold on to them or try to use them to increase share. Our hope would be that given the pressure on the industry's volumes, that we would hold on to some portion of those. Historically as prices have fallen, the industry has given them back over time, and the highest margins the industry typically has is in falling material environments. The last one would have been around 2001. It would be typical.

Great. If I can sneak one more in. I know you mentioned before the margins on the higher end product and carpet and tile were slower and they were lower margins on the lower end. Can you help us quantify what that spread might be since there is more demand trading down now?

There are different products and different ones, and the different product categories are different. In ceramic, there tends to be more margin increases as the price points go up. Carpet tends to have more raw material increases if the prices go up. So as you look up and down the spectrum, those two aren't the same. And then even within the different price points, it depends whether you trade from stylized or differentiated products to more commodity products and how all that mix gives you different answers. There are products -- from one extreme to the other it could be 20% to 25% different on the margins depending on a differentiated high end product and a commodity low end one. And everywhere in between. At the same time the volumes are different to go along with them.

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

Thank you. Most of my questions have been answered, but Frank, some time ago you transferred some revenues from the Mohawk segment to the Dal-Tile segment. Have we now anniversaried that?

I believe we are still being slightly impacted by that, Keith. I can check on that if you want to call me back.

Let me call you back. That's all I have. Thank you.

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

Good morning. I wanted just to follow up on the comments about Unilin. You talked about sales decline in Europe and I don't remember you sighting that before. I imagine prices -- I guess that means units are going down. Can you just talk about that? And when that started to occur?

The Europe market, we started talking about slowing down at the end of last year. I believe it was in the fourth quarter. You have to separate out the different geographic markets as well as the different product categories within the market. If you look last year, or the last few years again, Unilin has had extraordinary results, and last year was an all time high with what was going on. What I said was that these really high results are not sustainable over the long term unless everything continues hitting perfectly, which is unusual. If you look at the segments this year, this past quarter, even with what is going on, if you extract the Columbia losses, the margins in the Unilin segments were about 17.5%. And the difference this year is both the US and the European markets are both slowing and some products are moving towards cyclical low points. And we have inflation based on the oil based materials and energy we use.

I'm trying to give you more color. If you look at what we call the laminate product grouping, it's made up of a European flooring business. The European flooring piece is doing better than the marketplace because of our premium product positioning, and it's not impacted as much as the commodity areas. In addition, in Europe, we have external MDF core sales, which we sell in the marketplaces, and those products have been falling both in sales and pricing and we believe those will continue to be compressed for a while.

In the US market, we continue to see slowing as the entire industry does. It's been impacted by the same increase in cost and in the quarter we've also had start up costs relating to the new equipment that is coming on. We have announced a 5% to 6% price increase in the flooring piece, and then the other part of the business is the IP revenue which tends to trend with the industry volume which is going down both in Europe as well as in the US. The other products in Europe are made up of roofing and other pieces. The roofing is maintaining its performance level, and while the other products which we sell into the construction cabinet furniture markets, they are all down. And again in this piece, the pricing is declining as well from the cyclical highs last year. So all those things are impacting the margin.

Now -- hello? Even with that, I think that we've had good results with the 17.5% margins I think in this environment are excellent. And again as you look forward to the next period, remember that Europe has vacation schedules and reduced business in margins. If you look back over the last two years, somewhere between 2% and 3% margin decline between the second and third quarters we have. And this year we are expecting with the lower volumes to have more production reduction in our production schedules. So I think that sort of gives you a broad overview of the whole business and where the pieces are and we think that we are outperforming the marketplace and we are well positioned. It's a tough environment.

That was a great summary. So are units negative in Western Europe and then I guess you suggest that they were positive in eastern Europe

Well, you have a lot of different products, and a lot of different --

In laminate?

The Western Europe -- like UK and Spain are down. I don't know if you keep up with the building in Spain, it's a disaster. The UK has slowed down significantly. You have to go country by country, but on average the Western Europe is slow and the volume has declined. And then you have the pressure on these other sales products within the market, and then Eastern Europe and Russia are still growing.

Okay. One more question on the IP. Is the IP fairly distributed between Western and Eastern?

Most of it -- it relates to where the production is. And the biggest production is in Europe, in Western Europe and US, where the majority of it is and then there's licenses all over the world from China to anywhere else you can name.

All right. Thank you very much.

You're welcome.

Thank you. I will now turn the conference back over to Mr. Lorberbaum for closing comments.

The environment continues to be very difficult. We are making the adjustments to our strategy based on what it is. We continue to focus on cost in the environment we are and putting ourselves in a good position as we come out of the cycle. These things always look disastrous in the middle of the down part of the cycle, which is where we believe we are, and we think we are positioning the business for the long term. We appreciate your interest in Mohawk and have a nice day.

Thank you. This concludes today's conference. You may now disconnect.