莫霍克工業集團 (MHK) 2008 Q4 法說會逐字稿

Good morning, my name is Lori and I will be your conference operator. At this time I'd like to welcome everyone to the Mohawk Industries fourth 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 session. (Operator Instructions). As a reminder, ladies and gentlemen, this conference is being recorded today, Tuesday, February 24th, 2009.

I would now like to introduce Jeff Lorberbaum, Chairman and CEO. Please go ahead, sir.

Good morning. Thank you for joining us to review our fourth quarter 2008 results. With me on the call is Frank Boykin, our CFO, who will review our Safe Harbor statement and later the financial results.

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. This call may include discussions of nonGAAP numbers. You can refer to our press release at the Investor Information section of our website for a reconciliation of any nonGAAP to GAAP amounts.

Thank you, Frank. Our fourth quarter sales were $1.485 billion, a decrease of 18% from 2007. The company generated operating cash flow of $199 million and reduced our debt by $100 million. We had $124 million of noncash impairment charges and $30 million of restructuring charges during the quarter. The restructuring charge previously announced was for the closing of manufacturing and distribution facilities to rightsize the business. Excluding these charges, the operating income was $61 million for the quarter. We reported a net loss of $128 million or $1.87 per share including these charges.

For the year 2008, our company sales were $6.8 billion, representing a 10% decline, with operating margin of about 7% excluding these charges. We generated cash flow from operations during the year of $570 million and reduced debt by $333 million. We also invested $218 million in capital expenditures, which focused on cost improvement and product innovation.

We are in an unprecedented time, with the US and world economies under great stress. Our businesses are suffering from the same issues as the entire economy, including increasing unemployment, falling consumer confidence, limited credit availability, declining business investment. In addition, the housing contraction had a significant impact on the purchase of flooring for our residential channels. The European economy has also rapidly declined over the last few months.

In this environment, we're focused on cash flow and the balance sheet. Our balance sheet remains strong with over $850 million of credit availability. All of our business units have as a priority to maximize cash by reducing costs, improving working capital, limiting capital expenditures, and focusing on actions which positively impact sales and margins. In 2009 we will have D&A of about $300 million and capital expenditures are planned at $125 million, but we are only spending as required. All our segments have taken aggressive steps and our capital structure and cash flow will allow us to manage through this downturn.

Thank you, Jeff. Net sales for the quarter as Jeff mentioned were at $1.5 billion or 18% down from a year ago. All of our segments were down, with business both in the US and Europe, and in residential and commercial categories down.

Sales on a constant foreign exchange basis were down 17% year over year. Our gross profit dollars were $356 million or 24% of sales. That compares to a year ago gross margin of 27% of sales. The drop is due to volume declines, cost increases, and restructuring charges.

Our SG&A was $325 million or 22% of sales. SG&A was up slightly due to restructuring, would be flat without the restructuring charges. Impairment charge of $124 million was due to the continuing stock price decline that we saw in the fourth quarter as well as continuing business environment declines. This $124 million impairment charge included $65 million that was related to the finalization of our Q3 charge with the remaining $59 million related to Q4.

Our operating loss including these charges was $93 million. Our operating income, excluding the charges, came in at $61 million or 4% of net sales, which is in line with our expectations. The restructuring charges of $30 million in total included $17 million in the cost of goods sold and $13 million in SG&A.

Interest expense at $30 million was down from last year due to lower debt levels and lower interest rates. Other expense of $18 million was up due to unfavorable foreign exchange as the peso and the Canadian dollar impacted us unfavorably for the quarter.

Our income tax benefit as reported was $14 million, and that reflects a tax rate benefit of 10%. Our year-to-date rate excluding charges was 23% to 24%, and we expect our tax rate going into 2009 to be in the 20% to 22% rate. However, the 2009 rate could be impacted differently based on earnings levels and mix of business in 2009. Our loss per share was $1.87 per share for the quarter.

If we jump to the segments, the Mohawk segment sales at $801 million were 17% down from last year. This was due to a slow residential remodeling and new residential construction business as well as our commercial business also beginning to slow down more.

Operating income in the Mohawk segment included $23 million for impairment charge and an additional $23 million for restructuring charges. Operating income excluding charges was about flat at a loss of $3 million.

Dal-Tile sales at $413 million were down 12% from last year, as they were impacted more this quarter from the commercial decline. Operating income in Dal-Tile included $5 million in restructuring, and no impairment charge. Operating income excluding charges for Dal-Tile came in at $47 million or 11% of net sales, which was reasonably good results considering the economy that we're in.

The Unilin segment sales came in at $292 million, down 26% from last year. Foreign exchange impacted us negatively by 6%. So on a constant exchange rate basis, sales were down 20% year over year. Operating income in Unilin included $101 million in impairment charge and $2 million of restructuring charge. Operating income excluding charges was $21 million or 7% of sales.

FX -- foreign exchange -- negatively impacted our operating income by $2 million and it also included $7 million of operating loss for our wood business as the wood industry has been significantly impacted by the slowdown in housing. Corporate category included an operating loss of $4 million for the quarter.

Turning to the balance sheet, receivables were $696 million, our days sales outstanding were 47 days, up about 2 days from last year. We've seen some deterioration in aging, but overall the receivables are still in very good shape. As we mentioned in earlier calls, we have a large number of customers -- over 30,000 customers -- with no one customer constituting more than 5% of our total receivables.

We do expect an increase in bad debt expense this year. Historically it's run about 20 to 25 basis points as compared to sales. It could go up as high as 40 basis points this year.

Inventories were $1.168 billion. That represents inventory turns of 3.8 times in the quarter, and all of our businesses are continuing to work to drive inventory levels down in this very difficult environment. Fixed assets ended the quarter at $1.925 billion.

Capital expenditures for the quarter were $63 million. That compares to depreciation and amortization of $69 million. We're currently forecasting CapEx for 2009 of $125 million. However, this could change and we will continue to monitor it and re-evaluate it as the circumstances change. Depreciation and amortization for this year, 2009, is expected to be $300 million.

Finally on the balance sheet, long term debt ended up at $1.954 billion. We paid $100 million of long term debt during the quarter, and I want to take just a moment to discuss the condition of our capital structure and our liquidity. We have a bank facility with the availability of approximately $830 million that expires in the fourth quarter of 2010. We have a receivables securitization facility with availability of $250 million that expires in the third quarter of this year.

At the end of the year, we had drawn down against both of those facilities $100 million, and in addition, we had another $115 million committed against letters of credit. So we had $215 million committed or drawn down against those two facilities.

The only covenant we have is a debt to capital covenant with a 60% limit. At the end of December, we were at 42%, based on the covenant definitions. We don't believe we have any risk of violating this covenant.

Our next term loan payment is due in the first quarter of 2011, and it's a $500 million payment. We don't believe we have any immediate needs to change our capital structure right now, but we continue to have discussions with banks to make sure we fully understand all our options and alternatives. We do have several alternatives even in this environment if we need in the bank market.

In addition, the bond market has begun to improve over the last 4 to 6 weeks with several recent deals in our category. The rating agencies have us -- Moody's has us on a review for downgrade, and Standard & Poor's has us with a negative outlook with a triple B minus rating. If Moody's does downgrade us, it would result in an additional $4 million of interest due to the stepup provisions we have in our loan agreements.

We strongly believe that we have sufficient cash flow and credit availability for this cycle. Between depreciation and amortization of $300 million and the CapEx we estimated of $125 million, further reductions in working capital this year, and future earnings, we should generate sufficient cash. I will remind everybody that we've generated over $350 million of free cash flow this year, and we paid down debt of over $330 million. Jeff?

Thank you, Frank. Our business tends to lead the economy into downturns and likewise into recovery periods. Since January 2008, we've taken many actions, including reduced full time staffing of our business by almost 6,000, shutdown nine manufacturing sites and a number of production lines. We cut warehousing by 1.25 million square feet. We've reduced inventory receivables, we've implemented multiple price increases, and we've improved business processes throughout the company. We continue to aggressively realign the structure of our organization to address changing business conditions during the fourth quarter and going forward.

High cost materials negatively impacted the fourth quarter and will have a significant impact on the first quarter of this year. In the first quarter, we're further reducing inventory and evaluating staffing and asset requirements appropriate for the environment. The Mohawk segment sales declined 17% in the quarter, with both residential and commercial businesses down.

Customer traffic in flooring retail stores dropped significantly in the fourth quarter. In addition, consumers continue to trade down to lower cost products. The commercial business began to slow more in the quarter as the category continued its cyclical decline. Price increases announced in the third quarter were implemented.

As we stated last quarter, raw material costs escalated higher than anticipated as oil peaked and remained at extraordinary high levels into the first part of the fourth quarter. As demand deteriorated in the fourth quarter, we cut production significantly to reduce inventory and purchase limited raw materials as costs declined. These actions lowered our inventory, but created more unabsorbed overhead in the period and increased the costs of FIFO inventory flowing into the first quarter. These decisions will benefit us long term, but will negatively impact our first quarter earnings.

We closed two plants and multiple distribution points and implemented many initiatives reducing infrastructure and increasing productivity and manufacturing logistics. The business has continued to adjust employment levels to current demand with an approximate 20% reduction of personnel in 2008 as well as reduced workweek levels.

Our polyester carpet products are improving their position in the marketplace as consumers prefer more value oriented options. We've broadened our Sorona product line made from corn to provide greater styling options. We have high style commercial products that have been introduced at lower price points with new nylon fiber systems.

Our new internet system we call Dragonfly is assisting commercial customers as they design present concepts for new projects. We completed the launch of our new wood product line and are broadening our customer base for those products.

Our Dal-Tile sales were down 12% in the quarter compared to last year, with a continued decline in the residential and a slowing commercial business also. Margins were impacted by declining product mix and lower production levels, creating negative absorption in the fourth quarter. The business improved its position in the declining environment as it leveraged its strong distribution system and broad product offering.

The business is focused on cost reductions including sales, manufacturing, and distribution staffing; lower alternative materials; improving transportation utilization; and modes. We also improved our America Olean distribution in two underperforming regions, we shut down high cost production lines and moved products to more efficient plants. We reduced personnel in this segment by about 800 since the beginning of 2008.

Inventory levels were balanced with declining sales and should come down as we go forward. Warehousing at the plants has been added to ship product more directly and reduce overall distribution expenses.

A new service center system has been tested and is being implemented to improve productivity, inventory turns and service levels. About 10% of our service centers were remodeled or relocated in 2008 and we're presently evaluating the consolidation of some low volume service centers. We're increasing our penetration in the Mexican market with a broader product offering and increased distribution.

Dal-Tile's also offering a direct collection program that targets large customers that import products with volume shipments from our manufacturing facilities which should improve the inventory turns of our customers. A new commercial tile is being introduced that utilizes patent pending technology that reduces bacteria growth by 99%. The team is also pursuing many opportunities to improve stone sales, which include making projects easier to visualize, providing exterior facades, and easier to install stone veneers.

The Unilin segment sales during the quarter are down 26% as reported, or 20% on a constant exchange rate basis. All products in both Europe and the US have declined from the prior year as the contraction in the economy became more acute. Sales were also influenced by our customers reducing inventory levels to align with lower demand levels.

The European market has moved into a severe contraction and will take time before we anticipate a recovery. The Spain and UK markets were impacted the most as home sales slowed. Eastern Europe and Russia performed better, but we expect the slowdown to affect these markets going forward.

With a significant pullback in spending on residential projects, laminate floorings fell both in the US and Europe. Production schedules have been lowered and older equipment in the US has been shut down. Cost reductions have been implemented, including staff reductions of more than 500 since the beginning of 2008, additional temporary production shutdowns, product and process re-engineering, and freight optimization.

We recently launched new innovative high end products which were wide planks with both high gloss and hand scraped surfaces. In Europe, we introduced a 2 meter link product, creating a new product category for this Quick Step laminate line. We've added new licenses for our patents in the period, but falling industry volumes are reducing reoccurring royalty payments.

Our roofing systems sales began to decline in the period. We're just starting to market a new line of polyurethane insulated boards to the same customer base, which should be a nice niche market.

Continuing the prior period trends, our European board sales remain under volume and pricing pressure. The board's selling prices have contracted severely, as much as the costs are fixed, and producers are trying to maintain volume, forcing high cost industry capacity to be taken out. We're also introducing new products such as finer fiber boards and focusing on thinner boards with unique end uses.

Our wood strategy is well underway in a very difficult environment. We completed the US product introduction, and have a complete offering from value to premium. We've launched new wood collections under our Mohawk brand and are aligning distribution for our Columbia and Century brands. New automation has been installed and is operating with lower labor and improving quality.

We're launching a new Quick Step branded wood collection in Europe with a proprietary locking system. We've improved the costs, quality and product offering of our wood, but the declining volume has offset our cost improvements. We will continue to have an operating loss of $4 million to $5 million in the first quarter.

The current environment is expected to remain challenging for the near term. We believe sales volume will continue to decline in the first quarter. The effect of lower carpet materials will not be realized until the second quarter. Carpet price increases did not cover the peak material increases, which have remained high into the fourth quarter.

During the fourth quarter sales decline, we significantly reduced inventory by curtailing production and material purchases, leaving a higher portion of higher cost inventory at the end. In the first quarter, the Mohawk segment is forecasted to have an operating loss resulting from the $60 million flowthrough of peak FIFO costs. Both our Dal-Tile and Unilin segments will continue to be impacted by the recession and lower consumer spending, resulting in lower production volumes and a declining product mix.

Based on these factors our earnings per share guidance for the first quarter is a loss of $0.80 to $0.89 per share. We will remain focused on managing the balance sheet and maximizing our cash generation across our businesses. We'll continue to reduce infrastructure, capital expenditures, working capital, and controllable costs. In the second quarter, margins will be positively impacted after the peak inventory costs flow through the first quarter and we have the seasonal improvement in volume.

Our industry has excellent long term potential with demographics which ultimately lead to continued growth when the economy recovery begins. As the largest floor covering manufacturing company in the world, we have an industry leading position in each of our major floor covering product categories. We remain positive about our long term prospects for our company. 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 from Raymond James.

This is actually Jeff calling in for Sam. Good morning. My first question is in regard to the guidance. Are you modeling any restructuring costs or additional asset writedowns in the guidance?

No, we're not.

Okay, no unusual one-time charges?

Correct.

And then unrelated follow-up. The $60 million in FIFO cost headwinds -- can you help me understand exactly how you got to the $60 million? What variance that represents?

That represents -- to take you through the process, we put our last price -- when we announced our last price increase back in the third quarter, our raw material costs in the carpet segment continued to run up, and didn't peak until we got into the fourth quarter. So we have a period of time there where raw material costs ran up higher than what we had anticipated and estimated when we developed our selling price increases.

That delta between the selling price increases and the peak raw material cost runup is in essence what we have in our ending inventory that has to flush through in the first quarter and that will negatively impact our earnings.

So it's $60 million of inventory that's at the peak levels?

$60 million of peak high cost inventory sitting in our December inventory.

And the $60 million is the total cost of the inventory, not the delta between the cost of that inventory and the cost of a normal -- ?

It's the delta.

Okay. All right, perfect. Thank you.

Your next question comes from the line of Dan Oppenheim of Credit Suisse.

Great. Thanks very much. I was wondering if you could talk about 2009 -- you talked about how you are expecting the volume to be down in the next quarter and how there's the overhead impacting the results. What are you thinking in terms of -- what are you going to be doing in terms of adjusting the overhead costs? How much of your businesses are in fixed and variable and what adjustments should we expect as the year goes on?

Let's start out with what we've already done. We've already cut 5,800 people. We reduced the different pieces we go through. We have gone -- let me get through the first quarter and go forward.

From the first quarter, you then have the raw material piece that we talked about of the $60 million flowing in the first quarter. We have -- the segment will be positively impacted as we go through the future quarters as those peak costs have flown through where they are. You also have the pressure in the volume in the first quarter, which should change as you go through the year.

In the first quarter, what we have is a seasonal low period that historically we have built inventories in the first quarter to move through the other quarters. In the first quarter this year, we're going to probably reduce production rates somewhere in the range of 10 %to 20% based on different categories in order to reduce inventories as well as the [raw] piece.

As we move out of that, we'll have the seasonal upturn in the production levels, which will offset those. We continue to evaluate the different volumes as well as the different capacities and pieces to keep them in control going-forward. We have multiple plans on the table and depending upon how things evolve, we'll take different actions as we go forward.

On your question regarding fixed costs, let me come back to you on that. We're still -- those ratios between fixed and variable are still moving around as we adjust capacities and all. Let me come back to you after the call on that.

Sure. No problem. Just for the follow-up, I was going to ask, in terms of -- you said the sales declines will abate as the year goes on. Just trying to get a better sense in terms of what the expectation is in terms of what sort of snapback is embedded in your thoughts right now?

We have multiple estimates as we go forward because our visibility is very short. I mean, it depends on what the consumer's doing and what the economy does, and what the government does, and is there any stabilization in the piece. But our assumptions are that you'll have the 10% to 20% we reduced in the first quarter as well as a seasonal pickup as we go in the second and third quarters.

Thanks very much.

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

Thanks, good morning. Afternoon. First question is about the competitive landscape that you're facing now, and how you're seeing your competitors react to the slowdown. Is price becoming more of a lever to try to drive sales? And how are you guys thinking about that in terms of your own business?

We're in a lot of different markets and products. They're all slightly different from each other. In general, I think there's a lot of discipline being had by most of the participants as the business is under great pressure. And as the volume's declining, it's difficult on everybody's cost structure. So everybody's trying to maintain as much pricing as possible.

On the other hand, as you go into these things, the things that tend to get affected most would be the commodity products, and any of the different product categories are under the most pressure, and people tend to be more aggressive in those trying to find some volume areas to run as you go through, as well as there are various promotions as people try to run -- so all those things are happening and are normal for what's going on. In general, though, there's a lot of discipline across the different product categories.

And again, I guess, in the extreme, in the more commoditized areas, there's more pressure. At the same time, in our business, we are going after some lower margin business that when business conditions were good, we would have left that for other people. So we're being more aggressive in taking on product sales in some areas that we may not have taken historically, and the combination of those things.

Great. And just a quick follow-up. When we look at the CapEx expectations for 2009 versus CapEx in 2008, where does the delta come from? What kind of CapEx spending are you eliminating year over year when you look forward?

We were putting in investments in order to update areas that we had, we had different areas -- now remember a lot of the CapEx takes a year to 1.5 years to put in. So you're going back now to plans that were put in in 2006 coming into 2007. We expanded some of our extrusion and manufacturing in order to give us more flexible capacity to meet the changing needs of the marketplace. We put in some new --

Laminate.

Laminate capacity in the US, as we thought that the marketplace was going to be growing more than it has. On the other hand, we shifted capacity from Europe to here, and given the Euro that's changed, it's had a positive effect on the cost in it. Frank, do you remember the other big projects off the top of your head? I get them all confused when I look at years. I think those are the big ones. There were more capacity pieces.

There were also other things to put in to improve quality and productivity, and we're being much more -- we have higher thresholds before we do than now. Presently our capital expenditures for 2009 either has got to give an immediate peak payback, very high, it has to give us some unique product proposition, or basically we're postponing.

I guess the question would be, it's very hard to see right now the market normalizing in the future. Does postponing the CapEx spending on these projects have a longer term impact when things do normalize for you?

Given the depth of the decline in the marketplace, we don't expect it to snap back overnight. So we think there's plenty of capacity to support those things. The things like we were considering at other points, maybe some greenfield or some acquisitions in other parts of the world. Some of those other parts of the world don't look so good right now. I'm not sure that's a negative at this minute. Some of the capacity we were going to put in ceramic. You don't need it at this moment in time. I think by postponing those decisions, it's not going to hurt us.

Great. Thank you.

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

Yes, good morning, everyone. Sorry for the background noise. I'm traveling today. With respect to the production curtailments, is it possible to isolate this impact on the fourth quarter and first quarter '09 P&L? Jeff?

I think the best I can do for you is line up the volume pieces and walk you through a high level view of it. If you go back historically, Mohawk ran the various plants probably on average somewhere in the high 80s, 90% of capacity as we went through the full -- we hit cyclical decline. Some areas were more, some were less.

The ones that might have been more would be the high capital intent areas, which would run higher, some approaching close to 100%. And those could have been things like our extrusion capacities, our ceramic production, even our board plants. What would happen is we would go into the year, we would actually run those different facilities during the low periods of the year to support the higher periods of the year.

In addition, the flooring industry as we look at it today and we're guessing at some of it, but we're guessing from the peak periods the present unit production run rates could be off 30% to 35%. Those run rates will be more or less from different products. We think laminate would be less and maybe wood might be more, and different pieces falling in between. There's been a significant downturn in the total volume.

And again, as we look forward to the first quarter, instead of building inventory, we said that we're actually going to cut the production somewhere between 10% and 20% from where we were in the fourth quarter going into the first quarter, going through. And we're doing that in order to reduce the inventories more in line with the volume that we think is necessary to support the business, as well as the inventory levels. Does that give you some sort of feel for it?

Yes, that's helpful. Frank, if I could follow up with you after the call on that in a little more detail. The other thing I was hoping you could give us a sense of is, with respect to your first quarter guidance, what are you using in terms of top line performance by segment? Is it possible to give us some quant on that?

We have not historically broken out each segment. Typically we've missed the different answers, so we just hope the average of the different pieces come out close to where we're guiding you, especially in this environment where there's very little visibility.

And then just can you give us what your percentage commercial is by end market or your commercial end market is by segment? What is your percentage commercial in each of the three segments?

I'll give you a rough guess, if you don't hold me to them exactly. I think the ceramic business is probably somewhere around 40%. It's increased as the volume in the residential has declined. As a percent of our business, we think we're slightly higher than the marketplace. I think we're probably similar to the Mohawk segment is around 25%, in that range. And then the Unilin business has basically none.

Okay, thanks very much, guys.

You're welcome.

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

Good morning. In terms of the 2009 free cash flow, with the reduction of CapEx of $100 million, should that allow free cash to be similar in '09 to what it was in '08?

I think if you just think through the different components of cash flow this year, depreciation and amortization like I mentioned running at $300 million, and then CapEx at $125 million or lower depending upon how the environment develops, and then further reductions in working capital. And then any future earnings that we generate this year.

Just doing the math on the CapEx and depreciation puts you at a $175 million number. And then between working capital and everything else, you could see free cash flow getting up into the same range that we have this year.

Great. Secondly, the $60 million. How much of that is input costs and how much of that is incremental fixed costs that were underabsorbed due to production?

The $60 million is raw materials.

So it's all raw -- that's all raw materials? And that's -- and over what timeframe would that product be used? Is that three months worth, four months worth?

Our inventories turn kind of 3 to 3.5 months. So that's what you're looking at in inventory at the end of December that's going to turn over the next cycle.

This all hit in the first quarter.

Last question -- in terms of the tile segment, the margins, I think as you commented, Jeff, hung in there pretty well in the fourth quarter, considering the sequential year over year slowing that we saw in growth. How do you think about the margin performance of that more commercial exposed segment as we look into 2009?

I mean, you're going to have the commercial business is going to continue to slow down. The question is what's going to happen to the residential, and we hit bottom or not. I don't know how much further there is to go down in the residential pieces. We continue to try to improve our position in the marketplace. You're going to have some cost positives of natural gas and transportation coming down.

And then you have the other side which is the -- again, we talked about on several occasions with all the businesses, the product mix, we continue to -- the average product mix continues to move down because people are not trading up as much on one side. So the customers aren't buying the same proportions. And the second is we're taking more business in the lower value areas that historically in good times we may not have been as aggressive in. You have all those impacting the results.

Margins will be under pressure in the first quarter in particular, as we take volumes down.

Thank you.

Your next question comes from the line of Steven East of Pali Capital.

Good morning.

Good morning, Steve.

If we looked at second quarter Mohawk and Dal-Tile, particularly Mohawk as you factor out all of the impacts from the first quarter, should we expect profitability coming through in that division in the second quarter? I'm trying to get a feel for how big of an impact these one time items are in the first quarter.

Just to start out. You know our visibility is limited as is yours, so you have a big question over what's going to happen with the economy and the consumer, which we're going to have to guess at. The first quarter inventory is coming down, which is going to help cash, but that decrease is not going to be repeated over the second quarter. And you have the seasonal improvement that's going to happen with it.

We have the raw material benefit of the $60 million that's going to come through in the first quarter. So you'll have a positive $60 million in the second versus the first.

We have through the business all the different cuts -- you don't get the improvement of the cuts you make the first day you make them. All the different cuts we've been making the last few months should start benefiting '09 as we go through it. You have the impact again like we talked about in the ceramic business of natural gas and transportation and distribution costs. So I mean our expectations are that the second quarter will be significantly better than the first quarter.

Okay. And then if we look at commercial, how much are you seeing it down year over year right now, and what are the trends you all are seeing?

We're seeing -- as we went through the third quarter and into the fourth quarter, as the whole economy tightened up, we're seeing similar decreases in the volume of both residential and commercial. And if you look at sequentially, I think you'd see that both fell somewhere between 5% and 10% of where they were before. And so that sequential decline happened in the fourth quarter from the third quarter. And it's anybody's guess what it's going to be next.

Okay. Thanks. And just one last question, if you look at your overhead decline -- I know you don't have the fixed costs for SG&A and COGS for overhead, but as you look at it, what type of percentage decline are you seeing say in the fourth quarter and first quarter of this year versus a year ago?

I think we have a difficult time telling the difference between the cost-cutting and the low volume, which is offsetting it. So what's happened is we cut the costs. The volumes decline is going up. So you have the fixed costs are going up, and again it's been difficult to cut as fast as the [sums] declined toward the last half of the year.

We never believed it would go here. We probably would have been more aggressive a few months ago. We didn't believe the rate at which it was declining. I can't give you an exact number on that.

If we looked at it on a dollar basis, could you -- are we down as fast as sales, percentagewise or -- ?

Why don't you give Frank -- he was going to try to break out the fixed and variable pieces a little different. Why don't you call Frank, which should give you a view of I think what you're aiming at.

I'll do it. Thanks a lot.

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

This is Ray Huang in for Mike. Just a couple questions, going back to the mix shift -- you were talking about customers going toward more value oriented brands. I was wondering you could give us a rough idea of what the margin differential between your value brands -- your medium and premium brands are by segment?

You expect me to have a lot of information in my head.

I said rough.

There's two parts. One is that the margin, the margins are different, but also the SG&A associated with them also changed. As you go up the line, the SG&A changes from -- on one extreme, we make custom products, you have sales people actually helping design products, you have very high SG&A on those which would show high margins, but they have to net out the differences.

As you go down the thing on the other extreme, you can go to product categories that basically you have very limited sample and sales costs. And so at the other extreme you could have SG&A costs less than half -- or maybe even more than that, than of the other extreme. And as you go down this piece, you end up again by channel and product, you end up with different values.

I mean, in an extreme -- you could have double the margin or you could have the same as you go up and down the stream based on products. But again, the more commoditized it is, the bigger the difference is in the piece. It could be 10 to 15 points.

That's on an operating margin basis? Or gross margin?

Gross margin.

It's not an operating margin basis -- you're saying that's a little more narrower because SG&A is higher or lower depending on whether it's a premium or value brand?

Correct.

Okay. Just a follow-up question. Going back to the raw materials, if raw materials were to stay where they are today, if you can give us a sense for what 2009 is? And also on a year over year basis, if you could talk about some of the major inputs you have, and how far that's down right now?

The inputs for the most part have all gone down, the oil related ones have gone down more. The nonoil ones, typically there has been pressure on those too, even like wood chips going into our board businesses. As the volumes decline, those have declined too. There's a decline going on in all the different categories.

I can tell you that no estimate we've had in the last six months has come out anywhere close to where it is. And the general thing we believe about now, according to the best guess, is they probably bottomed out. And many people believe that going forward they'll increase from here somewhat over time. But I wouldn't -- those are worth what you pay for them at this minute, which is not much of the estimate.

Given what we've looked at over the last six months, our estimates haven't even been in the ballpark. But we think they're toward the low end as they are now, and there will be upward pressure on them going forward. There have been different amounts, some significant and some not as significant through the various categories.

Right. Okay. Lastly on the other income and expense line, is that $18 million a good number to use as the run rate of Canadian dollar to the Mexican peso, or to stay the same? Or is there a better number we should be using?

No. If they stay the same, if there's no movement in the exchange rate, then I won't have that loss. So it's --

Well, on a year over year basis?

In other words, if it stays where it is right now, we'll have a loss.

Okay. Thank you.

Your next question comes from the line of Dan O'Neill of Prospector Partners.

Hi, your CapEx plan for 2009 of $125 million is a bit lower than what I was thinking of in terms of maintenance CapEx. I was thinking it was more $150 million to $160 million. Perhaps I was wrong -- but is the $125 million, is that a sustainable number over the next three years?

You're out a little further than we are. We've gone into this, Pete. I think the $125 million to $150 million is probably sustainable over long periods of time. I think in the short term we may be able to push it down more than the $125 million. I don't know. As if my group doesn't like that but I'm pressuring them. The question is how low can we stay at that rate? I don't know that.

If the economy stays like it is now, we'll stay at the lower run rates longer. Our maintenance historically has run about $100 million. Just flat maintenance.

Okay. And can you talk about your ability to pull down working capital? How much can you pull out in the declining market?

Part of our opportunity up to this part is every time we put a plan in to reduce it, the industry volume declines more. So whatever plan we put in place doesn't get us to where we'd like to.

As you can tell from what we're talking about, we're talking about pulling it down further in the first quarter, which is the worst quarter of the year -- again, managing the cash in the business rather than trying to maximize the profit margin, which we think is the right thing to do.

We believe that as the business goes down historically, we've used $0.15 to $0.18 for working capital for each additional sales dollar. The question is on the downside, can we get to that point? We're going to sure try.

All the businesses are focused on driving down inventories, improving the process and driving down inventories. In addition, just looking forward from where we were at the end of December, on the carpet side, we have higher priced or cost inventories and that cost will go down as well.

Could you provide a ballpark for working capital reduction for 2009?

Not at this point.

You have to make a decision. In your own estimate, decide what the volume's going to be, and take somewhere between 12% and 18% -- 15%, 12%, 18%, and pick a number you're comfortable with.

Fair enough. And could you tie the decreased CapEx and decreased working capital into your ability to meet the bond maturities in 2011 to 2012?

I think the way I would look at that is like I discussed before between depreciation and CapEx, that delta there is about $175 million. We should be able to continue to reduce working capital further from what it is right now. So pick a number to use there. $25 million to $50 million. And then in addition, earnings that we generate will also obviously positively impact our cash flow.

Our next bond payment is not due until the first quarter of 2011, $500 million. I have about $100 million of debt still on the balance sheet right now, which I should have paid by the time I get to the end of this year, and have more cash on the balance sheet when I get to the beginning of 2011.

And then in addition, like I mentioned, we have access to both the banking market and the bond market right now to additional financing, if we decide to go ahead and roll over our existing finances. I think between all those alternatives and options, we have plenty of opportunity.

Great. Thanks a lot.

You're welcome.

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

Morning, Jeff and Frank. First just a housekeeping question -- you mentioned the date outstanding on receivables. What was the bad debt expense, actual dollars for the quarter, Frank?

I'm not sure I have it right here in front of me. But I can get it to you if you want.

Okay. That would be helpful. I guess it brings up the subject you're seeing some of the pressure with the fragmented customer base. You mentioned 30,000 customers. Many of your customers are small companies.

Are you hearing from any of them any pressure from having working capital advancements to them by banks not being afforded to them? And is that part of where your estimate in the increase from 25 to I think you said 45 basis points comes from in the bad debt expense? Or maybe some discussion around that whole concern that we're seeing from small businesses today?

Yes, we're seeing pressure with a lot of our customers in terms of access to credit markets, not just our customers but consumers are going through the same issues.

There are a lot of those customers that use us for the bank, which means that when they buy product from us, they've already sold it. So they collect the money on the product before they have to pay us, and they're using the credit lines we have in order to support their businesses, which is how they always worked.

And if they're not selling and they're building inventory, they have a problem?

If they're not selling, they don't buy.

So if they don't have working capital needs then?

They don't carry an inventory, most of them.

You can reduce the -- there is a way to be in our industry with basically purchasing all the product after you've sold it. Now, depending upon your needs and working capital, you can actually make the sale. We can ship it to you and deliver it in less than a week, and they can install it to the customer. Many of them collect anywhere from 50% to 75% of the job the day they sign up for it.

So I mean they can actually exist with cash flow from the credit terms. And then they take the money and either they pay in cash or they get it in credit cards and they get the money through the credit card quickly. So --

Jeff, are you trying to say you're not seeing that pressure for small businesses with a lack of capital issues that some of the other companies we talked to are?

I can't say there's not pressure in the market, but it's not as drastic as if these were heavily inventoried pieces and having to subsidize the inventories.

It's not like selling to a distributor base.

Right, okay. Great. Secondly, just the broader picture. When you --

If I can just go back to your question on bad debt expense, it's 23 basis points for the quarter.

I'm sorry, how much for the quarter?

23 basis points.

23? Great. Just a broader question -- how many plants do you guys have right now after the nine you've taken, the sites closed?

A bunch.

A bunch. I would say above 100. I don't have the number in front of me of all the different divisions and pieces.

The reason I ask is it's hard for you guys, as we realize to be in a position where you don't have a crystal ball, you don't know how bad the world's going to be. And certainly we appreciate that. But we also -- there must be sort of a sense -- our operating manufacturing facilities can actually produce this many housing starts or this much nonres put in place in terms of dollars as well as in the home improvement dollars. So you have a capacity to utilization rates that will generate at full capacity X dollars of revenue.

And we're wondering, if you were to break it down into chunks, whether it nonres, commercial, home improvement, and new res, what are your underlying assumptions for keeping the amount of capacity you are at today open? Instead of chasing it, it feels like you're chasing it downward, have you -- do you have a macro perspective on each of those buckets that you use to make the decision -- okay, we need to close 9 sites, because we think housing starts are going to run at 2009, 750,000 or 500,000, et cetera, et cetera?

Just trying to understand how does a company like you with a company that's generating as much as $6 billion in revenues go about trying to stay ahead of the curve and what you're using for a macro forecast?

We do have our own estimate of what's going to happen for the year. We then bracket it between a high and low point. We make plans that say if we end up at this end of the range, what actions should we take. It goes down by business, by product type. And even within that, because of the backward integration, it's not a line, it's different material manufacturing plants that are supporting other things.

And so we take each of those, we develop an estimate for the overall business, we develop an estimate for each product category. And then we determine what they should be. Within there, you're going to have multiple options. You can -- at the peak of the industry cycle, we were probably running everything close to seven days a week, 24 hours a day.

So you start reducing shifts, you start reducing production within the lines. Some of the lines have unique attributes that other lines don't have as you go through. I don't want to make it more complex, but you have to get down to very minute detail. Unlike some industries that you have one piece of equipment, and it all does the same thing, we have a lot of unique pieces going after different parts of the industry. Ceramic --

And Jeff, I totally appreciate that. I guess we're trying to get a little bit more inside your thinking, strategically. For example, to say, we are a little bit more bearish than consensus on nonres put in place, or just a sense of where you are. So when we're modeling and we get some inputs from you, I think it's helpful to understand where you are in the big picture. I don't know that we've gathered that from you in this discussion right now so far.

Let's see how to answer that one. I guess --

We can talk offline if you want about it.

What happens, each one of the divisions has different answers to the same piece. Each one has different circumstances in the markets they're in. And so depending upon where it is -- even pick something, the commercial business, we have one piece that's in one segment, another's in another. They're going after different pieces. They have different views of the same opportunity.

We have in the carpet industry -- we have some part of our business that's really focused on hospitality. So that's got its own segment of what it is, and what that part of the business is going to do. We have that same hospitality in our ceramic business, but have a different view of the same thing, depending upon what projects and construction and new things that are going on.

If you want to call us, maybe we can try to break it down, but we start out with one piece, and as it goes through the different segments, you end up with different conclusions. At the same time, some of the different manufacturing capacities, some can be stopped and started, and others have to run continuous.

And if you have things that can stop and start, you do one thing. If you have it that runs continuous, you have to either shut down whole plants or whole lines, but the other one can you run it part time. There's different decisions through it. If you call us back, we'll try to give you more clarity to help you.

Your next question comes from the line of Carl Reichardt of Wachovia.

You've gotten through almost everything. Except I was curious as to your 2008 domestic versus international sales split. And obviously, I know you have limited visibility on '09, but do you expect any significant change?

I'm going to have to -- it will take me a couple minutes to find that, Carl, in terms of the split. But if we still have time on the call, I'll let you know.

Appreciate it, thanks.

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

Just quickly, we're eight weeks into the quarter -- would you care to comment on the rate of sales decline relative to the 17% decline in Q4 constant currency?

All parts of the business are declining. The customers we believe are reducing inventories in the period, just like we talked about our own business that we used to raise it. So some of them also used to raise it. Those are being contracted as you go through. We believe that businesses are postponing purchases. So we see a further decline in the industry's volume rate from fourth quarter to first quarter.

And then Jeff, I'm more interested in wood and ceramic and laminate concerning this question -- any feel for the competitor fallout to date or anticipated?

You have to take each business as sort of unique. The ceramic business in the US, what you have is dramatic -- you see a significant traction on the imports, which are spread throughout the world in different pieces, and so the imports are taking a significant reduction.

I can tell you in Europe, the ceramic manufacturers are going to go through a dramatic contraction over there from two points. One is that the base business there has declined, and their ability to export, which was a major piece, continues to decline. So that industry there is going to contract significantly.

What else? The wood ceramic laminate. Laminate in the US is going through a contraction it hasn't gone through historically. And so you have a lot of smaller players that are going to have a difficult time getting through it, maintaining their business. The imports have declined somewhat over time as that capacity moved over to the US, a lot of it coming out of Europe, but less of it today as this declined.

I think that in Europe, you're going to have a significant -- they're going to have to be a significant reduction in the capacity in Europe for some of the same reasons we discussed of ceramic, which is the exports outside, there's more local producers around the world, and that the European economy has contracted. You'll see a contraction there.

What else -- we're aware of some companies under great stress as we speak. So most likely many of them -- some of them aren't going to get through it. And the question becomes, do the assets get shut down or do they just change hands. In this environment in both countries, the ability to raise capital is here. So there may be some capacity shutdown that hasn't happened historically.

The wood business, I guess the wood business has been contracting as the -- it's been consolidating and there will probably be more of it. I don't know how to get you closer. You have to go by each supplier in the industry and determine whose capability of making through a downturn.

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

Keith, before you ask your question, let me just say we have about 15% sales for the year outside of North America, for the question that was asked earlier. Sorry about that.

That's okay. On Columbia, you had talked about $4 million to $5 million of losses in the first quarter. Is that just the kind a loss level we're going to see from that business until hardwood volumes improve? Or is there something on the cost side you can do to get these losses down without the volume?

What's happened to us is we've done a lot to get the costs down. But what's happened, as we reduce the cost, the volume's gone down and offset the cost improvement. So we have reduced the staffing of the plants dramatically. We've improved the quality of the plants.

I think we have not achieved the sales of the new products as much as we have, because in this environment, it's difficult to get people to take on new products, new lines as they're trying to minimize costs. So as we went into this thing, we assumed we would be able to increase our distribution more than we've been able to accomplish, and at the same time we'd be able to improve our product mix. So we're having a more difficult time accomplishing the sales side.

I think the structure from the backside we put in new systems in the place, we put in new automation in the places, we've created we believe the best product line in the industry. So we need some help. At the same time, we're still looking to cut costs as we are in every other product.

To get more distribution, are you pushing more direct sales, Mohawk sales? Or more through the distribution base?

We're going both at the same time. We have more control over the Mohawk piece, as you would suspect. So the Mohawk piece we're putting out more samples of product in the field as we speak. We're investing in those in the last quarter. And then going forward in quarters, in order to get distribution through the Mohawk side.

On the other -- the distribution side, we use two brands, Columbia and Century, and as you would suspect, it's difficult to get third parties to invest in anything in these environments we're in. We are getting some. It's just not the magnitude we like it to be.

Your final question comes from the line of Laura Champine of Cowen and Company.

Hi, this is actually Ike calling in for Laura. I see it's getting late. I have a quick housekeeping question -- in regards to the foreign exchange losses, that you guys got in Q4, can you talk -- can you shed any light on Q1 or all of 2009 in terms of what you are expecting in the other expense line?

I mean, I'm unable to forecast what the exchange rates are going to do. I'd have to walk you through where they come from, which isn't [easy].

Well, just, the exchange rate losses we had are basically coming out of Mexico, with the manufacturing operations we have down there. And as the peso declines in value from one quarter to the next, that decline in value, that's reflected in their financials. It's run through our P&L. And that's what we saw in the fourth quarter.

Doesn't the asset value also go and down?

Yes, that's what I was talking about.

The asset value as well as the sales as it translated back as well as the margins and profits, will get impacted --

I can talk to you offline about the process, but we're not prepared to forecast with exchange rates.

Thanks.

Thank you, I'll now return the call to Jeff Lorberbaum for final remarks.

Thank you. This is a very unusual environment we're in. We're taking aggressive steps to manage our cash within the business. We believe we have a good structure underneath with our balance sheet and financials to manage through the environment.

We're making tough decisions of reducing staffing and cutting costs as we go through. We think we are positioned well to get through this, and we'll continue to do everything to maximize our business in the short term. Thank you for being on the call. Have a good day.

Thank you. That does conclude today's Mohawk Industries fourth quarter 2008 earnings conference call. You may now disconnect.