莫霍克工業集團 (MHK) 2009 Q1 法說會逐字稿

Good morning. I will be your conference operator today. At this time, I would like to welcome everyone to the Mohawk Industries first quarter conference call. (Operator Instructions). As a reminder, ladies and gentlemen, this conference is being recorded today, April 24th, 2009. Thank you.

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

Good morning, and thank you for joining to us review our first quarter results. With me on the call I have 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 discussion of non-GAAP numbers. You can refer to our press release at the investor information section of our website for a reconciliation of any non-GAAP to GAAP amounts.

Thank you. Our first quarter sales were $1.2 billion, a decrease of 30% from 2008, and included two fewer days than last year. We recorded a $122 million charge from cycle of discontinued carpet backing. Sales declined 20% excluding the sales allowance on a constant exchange rate with comparable days.

We had a loss in operating earnings of $146 million as reported. We had operating income of $42 million excluding the carpet tile charge, the $62 million inventory FIFO flow through, and a $4 million restructuring cost. Our earnings per share in the first quarter was a loss of $1.55. We have stopped shipping the recycled backing system and are currently providing products with an established technology and proven history. We're satisfying our customers and have recorded the expense.

All segments anticipate positive operating income in the second quarter. In the quarter, we generated $38 million of operating cash flow which is $118 million improvement over the first quarter 2008. Working capital improved with inventory slowing down $183 million.

The balance sheet remains strong with a cash balance of $137 million, and credit availability of more than $800 million. The business is emphasizing cash management by reducing costs, minimizing working capital, and cutting capital expenditures. This year we estimated depreciation and amortization of $290 million, and capital expenditures of $125 million, which have not been fully committed. Our expected cash flow in capital structure will allow us to successfully emerge from this downturn.

The economic conditions in both the US and Europe have remained weak. The industry is soft in all channels, including new and existing home sales, residential remodeling, and commercial. Our customers have a guarded outlook and are minimizing inventory levels by reducing purchases below demand levels. Commercial construction and remodeling projects are being postponed due to the uncertainty in the economy. The government stimulus, lower interest rates, and easing credit should improve the residential business as we go forward.

Frank, would you give the financial report?

I'll be glad to. As Jeff stated, our net sales ended the quarter at a $1,208 million, down 30% from last year. We recorded a $122 million charge which included $110 million sales allowance and a $12 million inventory reserve for discontinued carpet tile backing. Excluding the sales allowance and on a constant exchange rate and days basis, the sales decline was 20%.

All segments in most product categories were down year-over-year. Our gross profit was $154 million, or 12.7% is of net sales. Included in cost of goods sold impacting our gross profit is the $62 million charge for FIFO inventory cost flow through from the fourth quarter. In addition, we had $12 million charge for the carpet tile inventory write-down, and a $4 million charge related to the restructuring. Gross margin, excluding these charges, would have been 25.9%.

SG&A came in at $300 million, or 24.8% of sales as reported. SG&A is down 11% year-over-year. As a percentage of net sales, SG&A would have been 22.7% if we exclude the sales allowance. The operating loss was $146 million. Excluding charges of $122 million for the carpet tile charge and $62 million for the carpet raw material costs flow-through, and $4 million for the restructuring charge, operating income would have been $42 million, or 3% of net sales.

Interest expense was $30 million, which is down slightly from last year. Both rating agencies, as we previously reported, have downgraded to us a rating of BB plus. This will result in an increase of our interest expense by 50 basis points on our outstanding bonds, and equates to about a $7 million incremental interest charge annually.

Our income tax benefit was $73 million for the quarter. We had an unusually high tax benefit at a tax rate of 41% this quarter. This higher rate is due to quarter-to-quarter changes in our earnings. However, for the future quarters, two, three, and four we anticipate a tax rate in the range of 20% to 22%. Our net loss was $106 million and loss per share of $1.55. Excluding the carpet tile charge, using a 41% tax rate, our loss per share would have been about $0.49.

If we jump to the segments, the Mohawk segment sales came in at $594 million, or down 34% from last year. Sales excluding the carpet tile allowance would have been $704 million, or 22%, or down 20% on a constant days basis. ur price increases appear to be holding, however, with some pressure and limited areas. Our operating loss was $179 million, and includes the $62 million FIFO inventory charge and the $122 million carpet tile charge. Our raw material costs have remained low.

Operating income excluding these charges would have been $5 million at about a breakeven level. Dal-Tile sales came in at $368 million or down 20% from last year. The sales would have been down 16% using a constant exchange rate and a constant number of days. We are continuing to improve our market position in this segment. Operating income was $21 million or 5.9%. We were negatively impacted in this quarter as we took reduction capacity down to reduce our inventory levels.

The Unilin sales came in at $268 million, down 34% from last year. Sales were down 24% using a constant exchange rate in number of days. Operating income was $15 million as our board businesses continue to be under pressure. We had a negative impact from exchange rate in the quarter of $3 million. Operating income excluding the charge of $4 million for a wood plant closing would have been $19 million, or slightly over 7%.

Our corporate segment resulted in an operating loss of $3 million which in line with last year. We jump to the balance sheet, we ended the quarter with cash of $137 million representing a $43 million increase from the fourth quarter and includes $85 million in cash investment. Receivables ended at $785 million, or slightly over 48 days. We had some impact from negative channel mix and some deterioration in aging, but it continues overall to still be in reasonably good shape.

Inventories came in at $986 million representing 3.8 turns for the quarter. We continue to drive inventory down in all segments with inventories going down by $183 million since the end of the fourth quarter. Our fixed assets at $1.9 billion included capital expenditures of $27 million, depreciation and amortization of $68 million during the first quarter. As Jeff had reported , we expect the full-year CapEx to be in the range of $125 million, with depreciation and amortization in the range of $290 million.

Our total long-term debt ended up at a $1,981 million. During the first quarter we generated $38 million of cash flow from operations, which is $118 million improvement over last year. We also generated $11 million of free cash flow.

I would like to take a moment to remind everyone of our capital structure. We have a bank facility in place with approximately $830 million of availability that expires in the fourth quarter of next year, and a receivable securitization with availability of $250 million that expires in the third quarter of this year. At the end of the first quarter this year, we had drawn about $115 million on all these facilities, plus we had another $120 million committed against letters of credit. The one covenant we have is a debt-to-capital covenant with a 60% limit and at tend of March we were at 42%. We don't believe we have any risk in violating this covenant. Our next term loan payment is due in the first quarter of 2011 for $500 million.

We're anticipating good cash flow through year. We expect that the impact from the carpet tile allowance will be about $80 million net of taxes over the next two years. We don't have any immediate needs to change our capital structure, but we continue to look at alternatives. The bond market continues to improve, and offers an option for long-term financing. We've had discussions with banks to understand our options there as well. Asset-backed loan revolver appears to be the best alternative, and we believe we could support up to a $600 million facility.

The current market conditions include a three-year term with approximate up-front fee of about 400 basis points and an approximate LIBOR spread of 400 basis points with no financial covenants. We strongly believe that we have sufficient cash flow and credit availability to manage through this environment.

Thank you. All segments continue to focus on cash generation are reducing infrastructure, operating cost, CapEx, and working capital. Our management is actively pursuing all opportunities to improve the business and position us for the recovery when it occurs. During the quarter we cut employment levels by almost 2,000, shut down four operations, reduced warehousing by about a million square feet.

We reduced production units below sales levels to bring inventories down during the quarter as lower capacity utilization negatively impacted overhead absorption and reduced margins in the first quarter. The Mohawk segment sales declined 34% as reported. The sales declined 20% excluding Encycle allowance with constant days. We've been shipping the backing for about two years. In 2008, most of our carpet tile was shipped with our proven vinyl technology.

The Encycle backing accounted for less than 15% of our total commercial volume. Under certain circumstances, we had technical issues with this backing related to product acclimation, site conditions, and installation specifications where the tile did not lay flat. We are satisfying our customers. Most of our carpet tile production was used our established vinyl backing and has exceeded market expectations for more than 15 years and shipments will continue on schedule.

At the end of the first quarter, we recognized we had a higher trend of [instance] occurring on the recycled backing and recorded a $122 million allowance to cover remediation where needed. The majority of the cost is for labor to correct the affected installations. Last fall we also developed a new thermal plastic backing technology. The new backing is performing well at select projects across the country and we'll increase the shipments over time. In the first quarter our commercial carpet sales were in line with the industry.

Raw material costs have remained relatively stable since the end of the year, and based on current estimates, may increase slightly through the year -nd. Our margins are showing improvement as we progress through the period excluding impact of the unusual events. Industry pricing has remained relatively stable with pressure occurring in some specific areas. Seasonal sales improvements will increase capacity utilization and second quarter results should be positive.

During the period, we reduced headcount by over 1,000 and closed two plants to adjust to lower demand. Our emphasis on tighter quality controls, improved processes, product reengineering, and monitoring systems are improving our costs. Productivity improvements in staff reductions are enabling us to control our direct labor costs per unit, even with utilization declining.

We have made further reductions in selling, administrative, marketing, and distribution expenses. We continue to learn the business structure with demand. New product introductions are being delivered to customers and should positively impact sales. Our (inaudible) products continue to have a greater decline due to the impact of new residential housing to the total.

The Federal Trade Commission recently announced that they approved a first new carpet fiber since nylon was introduced 50 years ago which we use in our SmartStrand and Sorona products due to its unique characteristics which provide higher durability, stain resistance and softness. This is a confirmation of the premium attributes of our SmartStrand product, and it should benefit its position in the market as we go forward.

In anticipation of federal spending, our commercial business is emphasizing government, education, and healthcare markets where we have either a number one or two position in the market. The breadth of our product offering allows us to satisfy the complete needs of any project where the styling, performance are budget focused. Our new product introductions are providing greater value to meet the needs of tightening budgets.

The Dal-Tile segment sales were down 20% in the quarter, or 16% on a constant exchange rate with comparable rates. Our commercial sales continue to decline as business investment deteriorated in the period. We believe our overall market position has improved due to our strong distribution capabilities. Higher unabsorbed overhead costs compressed margin as we cut inventory levels by reducing production. In addition, our distribution and selling costs were deleveraged due to lower volume.

We continue to reduce sales, marketing, administration and distribution infrastructure. We've consolidated several low volume service centers as well as reducing staffing is and renegotiating rents in many others. We've improved our manufacturing productivity, product yield and distribution costs. Material costs have been reduced by using suppliers closer to operations with lower transport costs. New warehouse management systems and freight strategies are being executed to lower inventory levels and trucking costs. We're introducing a new engineer stone program that's used both for inside and outside applications, and a new wood program that our architect representatives will begin specifying.

Our commercial sales efforts are focused on government projects and military education and public housing and prisons, similar to the Mohawk (inaudible). We continue to gain position in the home center channel at the expense of imported ceramic alternatives. We continue expanding our distribution and product line in the Mexican market, which is performing better than the US market. We also receive dealer choice awards at the shows as well as floor trends styling excellent awards this quarter.

The Unilin sales declined 34%, or 24% with a constant exchange rate and comparable days. The rate of decline was more challenging in the first quarter with the economic slowdown becoming more difficult and customers reducing their inventories.

Our US and European laminate business reflected a slight improvement in the latter part of the quarter due to positive acceptance of our new introductions reaching the market. In Europe, we introduced a new scratch guard protection which significantly enhances the durability and [light] of our laminate flooring.

The Russia market continues to perform better than the rest of Europe and we began locally inventorying product to improve our service and expand our customer base. We signed additional license agreement for our patents, but our volume based revenues have contracted with the industry. Board selling prices and volume are still under great pressure due to the excess capacity and low demand.

The roofing structure sales have continued to decline with the market. In first quarter, we reduced inventory, warehousing, direct labor, selling and administrative costs. In the US, we introduced new product to satisfy the more value-conscious consumers. We've launched a new line of wood product to transition previously sourced product to internal production. We are consolidating the management structure of our board products. We've temporarily closed one of our wood flooring plants in the US and recorded a $4 million restructuring charge. This will reduce production costs until the capacity is required.

In the second quarter, we're considering the closure of a European laminate flooring plant which will consolidate two operations together if it's confirmed. Seasonal improvements in volume should increase utilization rates and positively impact all of our business in the second quarter. All of the segments are expected to have positive operating income in the second quarter from higher production rates, cost reductions, lower infrastructure, and reduced material and energy costs.

Based on these factors, our earnings per share guidance for the second quarter is $0.43 to $0.52 per share. Excluded from this guidance is an estimated second quarter restructuring charge of about $15 million related to potential capacity reductions. We do not see significant change in the flooring category in the near-term. We're maximizing sales opportunities while managing the cost structure and working capital. We continue to reduce infrastructure based on industry conditions and maximize our cash position. When recovery begins we should benefit from the restructuring and other initiatives that have been implemented.

With that we'll be glad to take questions.

(Operator Instructions). Your first question comes from Michael Rehaut from JP Morgan. Your line is open.

Hi, thanks. Good morning everyone. First question, something, Frank, we talked about before. I was wondering if we can just hit on this again. In terms of the raw material flow-through on the Mohawk line, consistent with your expectations last quarter, you had about a 60 million hit as you work through some of the higher cost inventory. With that done and 2Q reflecting more current inventory or raw material prices, I was wondering if you could, in looking towards 3Q and 4Q, perhaps. With oil where it is right now, with nylon and polypro where they are right now, do you expect any incremental benefits from raw materials headed into the back half, or from the cost side, given the current environment and pricing. Are you - - the 2Q guidance that you've given, is that largely reflect that the recent coming down in commodity costs?

The commodity costs during the quarter remained relatively stable from the end of last year. As we look out in the future, as part of a guess, we believe that going forward the material cost should remain relatively stable through the year. There are some indications it may go up, so the projections aren't perfect, and the last two years they haven't been any good at all. But assuming that they're relatively stable, that's good with it. And we don't perceive that there's significant benefit from a decline over the second half of the year.

I'm just talking about relative to 2Q, your guidance in 2Q. The assumptions that you are building into there in terms of material costs. And my question more is that there's not like a continued drag from the higher cost of last year affecting 2Q, but rather 2Q is more reflective of the improvement in commodity costs that we saw in the back half of '08.

That's correct. If anything, there may be a slight difference in timing possibly of from some inventory more or less, that drag over or not. But for the most part, we'll be operating on the cost from the lower cost structure.

Okay, great. Second question, just as it relates to Unilin. That's been an interesting story from a margin standpoint over the last couple years. Initially when you acquired it, given that the volume was better than expected, you got some great throughput or follow-through on the margin side. Now we're in the mid 7% range the last couple quarters. What are you thinking about that going forward, and are there incremental restructuring actions that you can take, or from here on in is it going to be more of a volume driven story?

To begin with, we're cutting costs there, too. I think in the first quarter, we reduced the personnel and the business by about over 300. I don't want you to believe that we're not taking action to manage the business in all the various segments. In addition, you're correct, but if you look at the EBITDA in the first quarter there's actually an 18% EBITDA, which is not a bad position to be in, which we think is much better than the entire industry is anywhere close.

As we go forward we're going to continue managing the pieces. It's not any different than the rest of our business. The European economy has deteriorated rapidly like the US economy. The part that's related to housing has dropped dramatically with credit. Markets like the UK and Spain are off much more, which we have significant business in. So the same thing the rest of the business is dealing with, we're dealing with there, too.

As we look forward, it's going to take awhile for some of the conditions to change. Our laminate flooring business is actually doing the best of all the different product categories in the business. The other pieces where we have boards that we use internal and external. The external portions are at very low pricing in the marketplace. They're highly capital intense business, and so those businesses have gone from a year, year and a half ago ,at cyclical high margins, they've gone to basically cash costs, and those kinds of pieces, which is typical. There is capacity coming out of those, and there will be more capacity coming out. And the companies with good low cost positions, which we have, will end up doing very well once we get through this portion of the cycle. What else can I tell you about?

Mike, one thing I would add is we will see improvement, I would say, from Q1 sequentially into Q 2, 3, and 4 in the margin, for Unilin, but we're not going to see them at the same level they were last year until we see some volume improvement.

Is that more related to a seasonal trend, or is that more a flow-through of some of the cost actions that you've taken?

All of the above.

Thank you.

You're welcome.

Management requests that you limit your question to one primary and one follow-up. (Operator Instructions). Your next question comes from Eric Bosshard from Cleveland Research.

Good morning. Can you give us a sense. I know in 4Q you tried to underproduce to fix the inventory and it didn't work out so good because the volumes were lousy. Can you talk about in 1Q how much you underproduced, and now are you done with that effort?

If you look at comparing the first quarter to ongoing, we cut the production rates in all the various businesses below, which is what allowed us to reduce the inventory levels from the the fourth quarter to the first quarter. If you look out forward just in general, we have a lot of businesses with a lot of different rates they're running at. But in general, I would say the majority will probably improve from the first quarter to the second quarter, somewhere in the neighborhood of 10% to 15% in the utilization rates as we quit pulling down the inventories as much and as the seasonal increase in business is coming along, which should after positive impact on.

So should production match sales in 2Q, or will you still underproduce a bit?

A lot of it depends on the demand levels, where we are. The basic plan set up today is to keep them flat to down slightly. But that can change, based on what happens with demand.

So we would think production and demand would be close.

Then my follow up is you made the comment sequentially that Unilin margin should improve from the 1Q level. Can you make the same statement about the tile margin?

Yes, we should see some improvement there as well due to the capacity utilization.

Thank you.

You are welcome.

Your next question comes from Steven East from Pali Capital. Your line is open.

Good morning guys. First question, just to follow on what Eric was asking, just a little bit differently. If you look at specifically with the Mohawk segment, because I assume that's where, one, you saw most of the raw material pricing pressure that came through. Two, probably the greatest capacity utilization decrease. If you looked at it either on dollars or as a percentage of sales, what type of op margin swing would we expect to see 1Q to 2Q in that division?

We were flat at the end of Q1, if you pull out all the unusual items. Hopefully we can kind of be in the mid single-digit range going forward.

Okay.

A little higher, maybe a little lower, depending on what happens with demand.

Okay. And then the other question, Jeff, you've talked about what you expect for raw material pricing as you go through the year. If you look at your product pricing, so far it's been pretty stable, you said, with a few items ticking down. What's your expectation as we move through the year, given both the demand cycle and as raw materials have backed off relative to last year?

Our assumptions are there will continue to be pressure on pricing in the marketplace, and the entire industry has more assets than the industry needs. So far we as a Company have tried to maintain significant discipline. We're going to continue to do that. On the other hand, as in any time we have, the more commoditized products that tend to have more volatility in the pricing, which is where more of the pricing pressure is today.

The other thing that's going on is that the mix change of the customers, as the customers have tried to reduce their expenditures and budgets, there's the downgrade in the average quality across all the different businesses and segments. Then the same thing, as we try to maximize our exposure to the marketplace, there are areas that we might not have been as aggressive participating in at points time. We're broadening out our participation, in all categories, and the combination of those things are lowering the mix, on top of the pricing.

Okay, I appreciate that, thanks.

Our next question comes from David MacGregor from Longbow Research. Congratulations on a nice quarter on the cost cutting.

Thank you.

I guess on the 24th of February we were chatting in the conference call and you indicated guidance of $0.80 to $0.89 loss and 35 days later you put up a pretty number, much better than that. I guess I would love to hear what outperformed your expectations over the balance of the quarter.

If you look at the operating margin and exclude what happened with the tax rate, I would say that it spread throughout each of the three segments equally, and there's not any one thing that stands out other than we've continued to focus in each of the divisions, in each of the segments, on cost control, cost cutting, and that's really helped us in the quarter.

How much was the tax rate?

For the first quarter?

Well, no, you cited that as a driver behind --

It was 41% was a benefit, right.

41% in the first quarter, and I think as I mentioned in my remarks, going forward in Q's 2, 3, and 4 it's going to be in the 22% range. We had really unusual tax rates with the fluctuation between quarters the way we've had it in the last few quarters in earnings.

I guess as a follow-up, I'd be interested in your thoughts on the distribution infrastructure that you have talked about as a potential cost saving opportunity and how much opportunity is left there. Are you concerned about exiting markets, or the operating costs of having to ship longer distances once diesel gets back to $4?

We continue to look through the distribution system and try to find ways of improving it. There are many ways of doing it. You start first with the shipments from the factories to the endpoint, and we're finding ways of reworking the business where we don't touch it as many times or stop as many times between points. We look at modes of transportation, how you put more of is it on lower cost modes. We look at how to manage the loads where you put a higher - - you raise the weight on each load to do that, and there's a balance between those things and the service levels that go along with them.

Within those, you can go back to the warehousing out in the marketplace. At points in time a few years ago, we made decisions that the business was going to expand for a period of time, and we actually rented warehouse space that was more than we needed at the time, expecting to need it in the future. And so what we're taking, and we've taken in some the fourth quarter and other periods, about writing off certain amounts of the space and moving out of those spaces that we go through.

We've talked about the Dal-Tile system, we have 250 service centers. The service centers, we have reduced the number of people in them. We're looking in certain market places as the volume comes down where we can have three or four of them. Can we do with one less? Can we consolidate them together and maintain the business? And we're making some decisions to do that. We're renegotiating rents where the rents are coming up in the near-term. We renegotiating rents and getting some concessions on rents as we go through. So we're doing a lot of things to manage it and hopefully we can find the right balance between service and cost.

How would you assess the remaining potential? Sounds like you've done a lot already, which is to your credit. I'm just wondering what's left in terms of up side from here.

I can tell you that in every part of our business, there are contingency plans being made for every part of continues. And the question is we put down, worse things get worse. If they get worse, how can we do them. Then there are other parts of the piece. Are there information systems and things that can allow to us operate the business differently.

Today we have new planning systems that have been put in and are still being executed in the Mohawk segment. We have new warehousing systems that are being executed in the Dal-Tile system. We have we call at service center system in the bottom end. All of these things allow to you see what's going on more and increase productivity. So those investments are being made which will help us reduce the cost further.

Again, we're looking at how to -- have we taken out where we do multiple touches, and are there ways of doing that and ongoing discussions in every category. I think there's probably some more left. We have defined it yet or we would have executed.

Do you move more towards independent distributors or try to continue controlling your own distribution but on a more efficient scale?

The decisions are two separate pieces. We actually look at the distribution. The third, the outside distribution at potential customers, and at all times we try to maximize sales through that distribution channel because they have different relationships with customers. One of the reasons our businesses are structured like they are, they have different brands and different product to segment them, so that we can have multiple avenues to get to the marketplace. So that's one distribution channel.

Separate from that, the Mohawk distribution channel in the Dal-Tile and Mohawk segments will continue to be there, and there's no plans to reduce those distribution strategies.

Great, thanks for that update. Quickly, what's your update on expectations for source cash from working capital in 2009?

I think working capital is going to be a source -- if that's your question. I t depends, too, David, if we get real lucky in the business up ticks at the end of the year, I'll have to give you another answer, but based on where we're running right now, it should be at the source.

Can you quantify that for us? I think you thought it would be a source last quarter as well.

I think it generally runs as much as 18% of sales, in that range.

Thanks a lot, guys.

Okay.

Your next question comes from Sam Darkatsh from Raymond James.

Just two quick questions. First off, in your prepared remarks, you mentioned that, I think, that the sales allowance would be $80 million over the next two years. Does that mean that you will you continue to take allowances against sales and EBIT like you did in the first quarter going forward, or is that an offset to what you already recognized in terms of charges in Q1? I'm confused as to the go forward impacts of the Encycle allowances.

Let me try on that one again. So, we set up a reserve of $110 million to use for future payments that we'll make for remediating the issues. That's our estimate for what it's going to cost in the future, and we expect that it will be paid out over two years. We don't anticipate - - so that is our best estimate, conservative estimate we don't anticipate having to do anything in terms of P&L charges in the future.

Got it. That's more clear.

And the 80 was cash. I just want to make sure you understand that. That's cash.

I do, thank you. Restructuring actions that you took in Q4, Q1, then upcoming in Q2, I think, if my math holds, is roughly $45 to $50 million or so. Can you give us a sense of what the structural cost that that $50 million P&L impact has been able to take out of your cost structure? I know that some of the savings are going to be dependent on volumes, but get a sense of what kind of permanent cost has been taken out.

We tend not to develop our numbers from the perspective you do. We start down with the bottom of it and say what can we - - what manufacturing assets are required, what flexibility is required, how do we manage the cost structure to do that, a bottom up structure that we then take to the top view what.

What we end up doing is analyzing it from a percentage of sales revenue, then focus on that as a basis to develop our future estimates and earnings for the rest of the year internally. And so we really don't roll them up in the manner that you are looking at. It's an adequate way of doing it. We just do it from the bottom up rather than the top.

But you would still, I would imagine, have a hurdle rate with any kind of capital allocation decision that you're making and a restructuring action, I would guess, would qualify as capital allocation decision. So how should we look at normally --

Let me tell you, the one and the first quarter, there was $4 million. The $4 million should take at most a year to get back. How's that one?

And is that normally the standard for our purposes, Jeff?

It's going to vary, Sam. Some are going to take longer, and some are going to take shorter, depending upon the complexity and the location and you deal with different laws here, as opposed to outside of the US.

In some cases there are non-cash write-offs and cash write-offs, so depending upon each one, it's a write-off, but it may be that it doesn't cost us any cash, and you get it back on day one.

And final follow up, regarding the restructuring would be, are most of these cost extractions of a more permanent nature, or would they be coming back should the volumes return?

The majority of the time that we write something off, it's permanent. The one in the wood business, that one is mothballed, so the costs are basically getting rid of the people, the inventories, and managing the change from one plant to another, because we believe down the road we're going need it. Other than that in most cases they're permanent forever.

Great. Thank you much, gentlemen.

Okay.

Your next question comes from Dan Oppenheim from Credit Suisse. Thanks very much.

Thanks very much. Frank, earlier you were talking about margins improving as the year goes on, but also talking about only limited price pressure in some areas. Can you talk about that among the other segments, where you are seeing that pricing pressure?

Pricing pressure in each of the segments? I would say in terms of selling prices, as Jeff had mentioned, we are seeing pricing pressure in commodity product, and in certain promotional areas as well. In Dal-Tile we've seen some pricing pressure with some of the surcharges that we've put in place, and, Jeff, I don't know if you want to address anything beyond that.

Again, across all businesses, the more commoditized the products are, the less differentiated, the more pressure on the prices everywhere. Then the other part that is hard to put a number on is the mix change which is the customer's purchasing even though we haven't changed the selling prices, they're buying more of lower margin products as you go through. Those things are impacting the average selling prices. And the third piece is, historically, we manage how much we do in different channels and different price categories. And in an environment we're in, we're being more aggressive in participating in some lower margin areas that we would not have when the industry was running wide open. It's a combination of all of them.

The other piece, the board business in Europe, again, is different. The prices in that change readily, they go up and down. And the margins there are - - the industry has given away all the margins to run the assets because of the high capital investments that are there, and that's more typical of other industries. Those margins will jump back the other way when it goes the other direction also.

Okay, thanks. In terms of that customer trade down, lower price points, would you lower price points generally be more commoditized would. That be then lead to lower margins on that as well aside from lower selling prices?

It already has.

The answer is yes.

Your next question comes from David Goldberg from UBS. Your line is open.

Good afternoon, guys.

Hi, David.

First question has to do with kind of the sequential sales trends during the month. And we've been hearing a lot of reports nationally that we're seeing some more foreclosure inventory get sold and clear the market. And whether or not you guys think that's going to show up in your business, and if not, maybe why it's not showing up now.

The foreclosure piece depends on who ends up purchasing it and what the intent is. Historically, when an existing home sold, the new owner went in and then typically the wife, who makes most of the decorating decisions, would start saying this doesn't meet my expectations, or I would like to the look different. And they would start remodeling the piece as soon as they had the economic ability to. And that could happen the same day or happen over the next two or three years. The real question is who is ending up with the houses, what's the purpose that they're using them for, and is it personal use, and then do they have the economic capacity to do the remodeling now or in the future. And under all that is the answer, which we don't have the answer.

So is you're not sure if -- you're not seeing more of a sales pickup sequentially even though you're seeing more turnover, you're not sure if it's because these homes are being purchased more by investors or because people don't have the economic wherewithal, to do the remodeling work right away, to make changes as it were?

Yes, but at the same time, I'm not sure it flows quite as fast as you have it. If it got close - if it got announced, or signs a thing that he's going to buy the house, I don't know how long after we see it. Does that may determine - they first have to move in it in many cases and then they start remodeling it. On the other hand, I can't tell how many of these are being bought for resale or rentals in the short-term by some people.

Your next question comes from Keith Hughes from SunTrust. Your line is open.

Thank you. Jeff, can you give us any feel for where raw materials in the carpet business stand right now versus a peak? How much have they come down? Just in aggregate, not the specifics.

There have been dramatic changes from the peak. If you remember the peak, we never raised prices enough to cover the peak back whenever. And those peak costs, it could be - - it could be half from the peak, but if you remember, the last 20%, 30% wept up, it went up, and we never got any pricing fort.

I know polypropylene is down, but I guess I'm specifically more talking about nylon. That's the one that's harder for us to find information on.

They're all down in different ranges. I don't think I can get you any closer than that.

Okay. Frank, you had mentioned $3 million loss in the wood business. Are you referring to Columbia? Do I have that right?

I said a $3 million negative impact on FX is what I said, I thought. And that there was a $4 million charge related to closing the wood plant in Columbia. Was there something else?

Your next question comes from Laura Champine from Cowen. Your line is open.

Good morning. Just had a question about capital spending, that 125 level looks about as low as it can go. But I'm guessing you don't need huge expansion next year either. How long can you keep CapEx below 200 million or close to that 125, 150 level?

It really depends on the demand and expansion into either other markets, other product categories and the investments you make in those. If you go back a year or two, we had on the plan to put up a new ceramic plant. The new ceramic plant was going to be over $100 million just by itself. With the industry where it is, the question, and it takes probably about close to two and a half to three years to get it up and operating from the decision point from zero to full capacity. So we're going to have to make decisions as we go along at what point. So that would be one type of decision.

Another, depends on our view of expanding into other markets and other places. We have talked about going into Russia, and we're distributing, so another piece is at what point do we put manufacturing facilities in there to support our laminate business. At the moment, we think that we can minimize that type of expenditure by using (inaudible) and assets we own and restructuring them around and limit the cost. One is, the big money comes in changing the business and doing investments to have it grow or support it or going into new products versus maintaining the present pieces, is where the investments come in, or deciding to extrude more raw materials or, or, or. So a lot of those decisions are demand driven and how we perceive it, and some of those have to start again, anywhere from 12 to 36 months before you want them.

Right. So I hear that it's subject to change, but is it fair to say that your plan for 2010 is still some $200 million?

Most definitely. Unless something changes, basically we're doing what we have to do. So it could be that depending upon what happens, we could be at the same level we're at this year. It could be that low.

Your next question comes from Dennis McGill from Zelman & Associates. Your line is open.

Thank you, guys. Just two quick follow-ups. On the guidance relative to what you actually delivered in the first quarter, I was hoping you could get a little bit more detailed relative to what you commented on earlier. On the revenue side, was March any different than what you would have expected toward the vend February?

The problem with it is that demand levels are so difficult to put in, and we've been missing them so far. The whole business, you get very conservative in what you are doing because your projections, you go back over the last 12 months, we haven't hit one of our internal projections that we've done. And so you sit there and you start putting brackets around it, and you try to estimate what the high and the low, and then we try to give the best information we can to the street,. And this is a difficult environment, which is why many companies don't give anything. So I can't really give you an answer except it's really got to do with the guesses of the future.

You're saying it's difficult to split out because your revenue assumptions and the brackets you put around revenue obviously are intertwined with costs, and it's just the volatile market makes it difficult to splice out exactly what was embedded in the $0.80 to $0.90?

We know what was embedded in it, what you're asking why we missed it. The question of why we missed it and that is all the different guesses at how cost is going to flow through at what the volumes are going to be.

The sales were not any better than what we had -- when we first gave the guidance for March and where we ended up, I'll say that, if that was your question.

That's helpful. And I guess kind of along the same lines can you give us some guidance on your revenue is embedded in the second quarter guidance?

We normally don't give guidance beyond just the bottom line, but we're not anticipating any top-line improvement from what we've seen from a run rate over the past quarter.

We don't expect to see seasonal changes.

Talking year-over-year.

We don't expect any different changes seasonally as a general piece.

Your next question comes from [Barrett Enan] from Brownstone Asset Management. Your line is open.

Just to follow up on your last question, I guess what you're saying you expect the trajectory of your top line to remain pretty similar on a year-over-year basis. So, I'm just curious, because your second quarter guidance is pretty good on the earnings side. Can you identify the main drivers that are going to - - because your margins are implying flat year-over-year on the gross margin side. Kind of curious, is mostly in raw materials, cost savings? How exactly are you achieving that?

Several things. One, as we go into, like we were saying, in first quarter, seasonally low, second quarter better. So volume is going to be up. Top line volume is going to be up from a seasonal standpoint.

We define somewhere 10 to 15% higher utilization rates.

Plus we'll be producing more in line with sales as opposed to first quarter where we were producing less than sales. So our overhead absorption numbers will be better. And as we've talked about first quarter impact of raw materials versus second quarter impact of raw materials in the carpet business, second quarter is going to be much more favorable, and then all of the cost cutting things we're doing in the second quarter.

And do you expect that trend to continue throughout the year then?

We would expect the results in the second quarter to be somewhat indicative somewhat of what we're going to see through the rest of the year.

Your next question comes from John Baugh from Stifel Nicolaus.

Good morning Jeff, Frank. Three things, real quick. Number one, would you be will willing to give out the Encycle annual revenue run rate? Number two, you talked about this asset-backed revolver. Is that something that's been done, heavily considered, likely to happen, or just a possibility? And number three, any color on the furniture and roofing segments of Unilin? What are they, roughly, in size, and are they losing money? Thank you.

Is that all the questions?

If you ask us more than one at time I forget them.

I get cut off. Encycle revenues, asset-back revolver, and Unilin, furniture, and roofing segment.

The Encycle since its introduction was total of about 150 million, in total, and it went up and down and up. Started out at one piece it reached a peak, then we pulled it back down. But that's the total over the life of it. The second question --

On the [ABL], John, really, the point I was trying to make there is that there are a number of different financing alternatives available in the market now for us. One of which would be bonds and long-term financing alternative, and the other that we've looked at and talked to banks about, we haven't completed anything, perhaps an asset-backed loan revolver alternative. So there's nothing concluded in any of those.

There was a third question which we didn't answer.

Third question - - Unilin, roofing business. Furniture roofing. How big are they? Are they making money?

I think what we've said there is they represent --

We said it represents one third of the total business. It's made up of multiple pieces. The biggest pieces in it are a board business and a roofing structure business. And what we continue to say over the past six to nine months is that the board businesses are highly capital intent. That they have - - that the price hag gone from cyclical highs to cyclical lows, and that we're at the cyclical low point. That the board parts are operating somewhere near cash costs or slightly better in the environment that they're in, but at an operating loss.

The roofing structure business is more related - - is a regional business of which we have of the category within the geographies we play, about a 50% market share. The business held up until we got into the fourth quarter. The fourth quarter, it started slowing, and in the first quarter hat continued to slow, along with all other investments, marketing pieces there.

In Europe, the first quarter was a little more - - the weather was a little worse than would be expected, so some of the projects got put on hold. So it should pick up some due to weather, as it would it normally do, but it was a little worse than normal.

At this time, there are no further questions in the queue. Mr. Lorberbaum, did you have any closing remarks?

This is a very difficult environment which all companies are operating. We are making tough decisions to run our business for the long term. We are cutting costs and infrastructure. And as we get through this on the other side, our cost structures and margins should be better as we come out, and as the volume picks up. We appreciate everyone being with us, and have a nice weekend.

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