莫霍克工業集團 (MHK) 2009 Q2 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 second quarter 2009 earnings conference call. All lines are placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer period. (Operator Instructions). As a reminder, this conference is being recorded today, July 31, 2009. Thank you. I will now like to introduce Jeff Lorberbaum, President and CEO of Mohawk Industries. Please go ahead, sir.

Thank you. Good morning, and thank you for joining our second quarter conference call. 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 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 second quarter earnings per share of $0.67 surpassed our expectations. Earnings per share were $0.79, excluding restructuring costs of $12 million. Operating income was $87 million, excluding charges primarily for the closing of a laminate flooring plant in Europe. Our results improved from the first quarter as we benefited from increased sales, lower costs and higher utilization rates. Second quarter sales were $1.4 billion, a 24% decrease from 2008 or 22% on a constant exchange rate.

During the quarter, we benefited from aggressively driving down costs, managing working capital, tighter control over capital expenditures and intense focus on our customers. Even with weakened demand in the quarter, we generated over $200 million in free cash flow, paid $122 million of debt, and invested $126 million in capital expenditures. We ended the period with a balance of over $225 million in cash. Our US residential and commercial businesses reflected weak macro conditions with low home sales, contracting business investment, and slow consumer discretionary spending. The European economy has contracted from the same conditions that are affecting the US economy.

The economic consensus is projecting that the recession will end during the second half of 2009 and begin growing in 2010. The benefits from the government stimulus package and impact the economy positively as the monies being spent increase the end of this year and next. Demand in both the US and European residential markets appear to have reached bottom and is showing signs of stabilization. The US commercial business continues to decline and represents about 25% of our total business.

Frank, would you give the financial report, please.

Yes. Thank you, Jeff. As Jeff mentioned, net sales of $1.406 billion were down 24% as reported or 22% on a constant exchange rate basis. All of our businesses are off as the environment remains challenging. Gross profit was $376 million or 26% of net sales, which is flat with last year, last year also being at 26%. Our gross margin, excluding charges, was 27% of net sales, with raw material declines and capacity adjustments supporting our profitability. SG&A dollars were $292 million or 20.7% of net sales. The dollars were down 13% from last year as we continued to reduce cost, but were impacted by declining sales as we deleverage.

Our operating margin, excluding charges, was $87 million or 6.2% of net sales. Included in the operating margin as reported was $12 million restructuring charge related to a closing of our European laminate plant. Interest expense was $30 million, slightly less than last year, which reflects our lower levels of debt. Other income and expense was income of $4 million, better than last year primarily as a result of favorable foreign exchange gains.

Our income tax rate was 6% as reported, lower than what we anticipated due to geographical income mix and unrealized foreign exchange gains. Excluding charges, our tax rate was 12%. Going forward in the third quarter and the fourth quarter, we expect our rate to be in the low to mid-teens, returning to the low 20% range in future years. Earnings per share were $0.79 per share, excluding charges, and as we had mentioned better than expected due to reduced raw material costs, timing of some expenditures, lower tax rates that I discussed, and a more favorable foreign exchange included in other income and in overall good performance at Unilin.

If we jumped to the segments, the Mohawk segment sales at $768 million were 21% below last year. This is impacted by lower volumes and negative mix which both continue to impact us. Our operating income came at $21 million or 2.7% of net sales. This improved sequentially from the first quarter with lower raw material costs this quarter and higher plant utilization rates.

The Dal-Tile segment sales were $377 million, 22% down as reported or 21% down on a constant exchange rate basis. Both the residential and commercial businesses declined, with Mexico performing better on a constant exchange rate basis. Operating income in Dal-Tile was $30 million or 8.1% of sales, impacted by lower volumes and fixed costs deleveraging.

The Unilin segment sales came in at $280 million or 32% down from last year as reported or 24% down on a constant exchange rate basis. These sales were impacted by lower volumes plus some pricing pressure in the board business. Operating income excluding charges in this segment was $42 million or 15.2% of net sales. Unilin turned in a strong performance, especially in light of this environment. They were impacted negatively by foreign exchange by $6 million in the quarter.

If we turn to the balance sheet, we ended out the quarter with the cash balance of $227 million, which includes over $180 million in short-term cash investments. Our receivables of $779 million represented 49 days of sales outstanding. This is up from last year, impacted primarily by channel mix, with our aging -- accounts receivable aging -- still in good shape.

Our inventories at $937 million represented turns of 3.8 times, which is in line with last year, and sequentially I would say we decreased our inventories from the first quarter by $50 million. Our fixed assets at $1.9 billion included capital expenditures during the quarter of $26 million and depreciation and amortization of $77 million. We continue to expect full year capital expenditures of $125 million, with depreciation and amortization for the full year of $290 million.

Our long-term debt for the quarter ended at $1.859 billion, down $122 million from the first quarter. We generated $202 million of free cash flow and paid down all of our prepayable bank debt during the quarter. We have plenty of available liquidity, and with the improving credit markets, many alternatives to consider for our capital structure. We expect to continue to have strong cash flow and balance sheet into the future and believe that we are well positioned for the future. Jeff.

Thank you. We're transitioning to a leaner, lower cost structure to emerge in a stronger position when the industry improves. After reducing production levels and cutting inventories in the first quarter, we operated all of our facilities at higher production rates. We further reduced inventory levels from the last quarter by $50 million and lowered headcount and other variable costs. We're reducing the infrastructure, adjusting production levels with demand, improving productivity, and consolidating some of our distribution structure. We are providing innovative products and services to bring value to our customers, redesigning processes, and managing our cash utilization. To streamline the business, we are investing in computerized process controls and inventory management and distribution systems. In the first half of 2009, our initiatives have reduced our SG&A by about $80 million from the prior year.

Our Mohawk segment sales were down 21% following the industry. Residential volume seems to be stabilizing at a low level with commercial expected to continue its contraction. Our pricing remains disciplined with pressure in the commodity categories. Product mix has been declining as our customers trade down to reduce project costs. After peaking, raw material costs improved and benefited our second quarter results. We anticipate third quarter raw material prices will be up slightly from the prior period. Energy costs were down during the second quarter and are not expected to change significantly.

During the quarter, improving seasonal sales, higher plant utilization rates, and lower costs help offset the deleveraging of our fixed overhead costs. We continue to cut controllable costs, including administrative, manufacturing, and logistics cost as well as reducing our infrastructure. We are rightsizing our commercial assets to reflect the industry decline. Our SmartStrand collection of residential products has been well accepted by the consumers and we temporarily exceeded our supplier's capacities, which will be corrected in the third period. Increased sales efforts are concentrated on multifamily and residential remodeling channels, which should lead the category out of the cycle. Having acquired the Wear-Dated brand this year, we are launching a new Wear-Dated DuraSoft collection this quarter, which features the softest nylon products in the category. Even our moderately priced rug sales are weakening and we are value engineering new products to create lower priced alternatives.

The commercial business is emphasizing the healthcare, education, and government categories, which have outperformed other channels during this part of the cycle. Our new commercial products are focused on style, value, and environmental attributes and are being well received. The Mohawk brand also introduced significant updates to our ceramic, wood, and vinyl programs, adding products with styling innovation and still specific price points. We're investing our product offerings and new systems for inventory, warehousing, and customer management as well as update our eCommerce systems. These investments will strengthen our business and support profitable growth.

The Dal-Tile sales were down 22% in the quarter or 21% on constant exchange rate as a result of the difficult economic environment. Dal-Tile has been impacted by the present contraction of commercial business which comprises 40% of our sales mix. We continue to gain share in the marketplace. with many of our regional ceramic competitors struggling with the industry conditions. A new builder program has been implemented and increasing our penetration with regional as well as national builders. The Mexican market is following the US cyclical downturn, but we continue to grow our business by broadening our product offerings and expanding our distribution channels.

We are making many long term investments in Dal-Tile, including digital color application, new systems for warehousing and distribution, new product innovations that include recycled content, and antimicrobial protections. We're launching a new engineered stone program for exterior and interior uses as well as a commercial wood program to extend our Dal-Tile product offerings. The sales and logistics infrastructure in Dal-Tile provide differentiation and value to our customers.

However, the fixed infrastructure has been deleveraged by the lower volume. We are cutting our logistics cost by providing some Mohawk and Dal-Tile regional distribution centers, consolidating some service centers, leveraging freight resources, and reducing personnel. We have further reduced our costs with many initiatives on productivity, quality, and product engineering. Our yields have improved and direct labor reduced, resulting in lower controllable unit costs.

Unilin sales declined 32% as reported or 24% on a constant exchange rate. Even in this environment, our operating margin was 15% and EBITDA margin was almost 30%, excluding the restructuring costs. All regions in Europe are being impacted by the economic downturn and exports are being complicated by currency devaluation in eastern Europe and Russia. Our laminate sales have declined with the residential remodeling and home sales.

Our new introduction of longer and wider planks and our high gloss products are being well accepted by the market. We are broadening our distribution with private label products and sales to big boxes and commercial channels. We are expanding our customer base with our warehouse in Russia to support local manufacturing in the future. Royalties were impacted by the declining industry sales and new licenses. Some new value priced laminate products are being offered to expand our offering and provide promotional price points to our customers.

Board demand is down in Europe, creating excess capacity and compressing prices in the market. We anticipate the industry will close facilities which are not low cost to reduce capacity. The roofing structure sales we have are also softening and selling prices have remained stable. A new installation board in this category has been developed and a production line will begin this quarter, and we'll begin shipping the installation products to our customers in the period. We've expanded our wood product line and are distributing it under multiple brands to penetrate both the US and European markets.

A new click system has been developed for wood that is easier to install than others in the market. And the US, we're in the process of closing one wood plant and consolidating our production. We're reducing Unilin's cost structure by cutting our SG&A, personnel, and improving productivity. Reductions in working capital, maintenance costs, and capital expenditures have been implemented. In Europe, we've closed a flooring plant and the cost has been expensed in the second period. We've restructured our European board organization to improve flexibility and cost. New investments are being made in technology, products, and systems to reduce costs and maximize our future.

In the second period, industry conditions were weak, and we anticipate the present trends continuing in the third quarter. Residential appears to be stabilizing at a low level with signs of improving home sales, which are supported by low mortgage rates. The commercial decline is occurring and we are adjusting our businesses to the demand level. Our carpet raw material costs are expected to increase slightly in the second half. The Unilin results are expected to be lower due to holiday shutdowns, higher period costs, and lower royalties.

We continue to take the right steps to manage through the downturn. Our third quarter guidance for earnings is $0.54 to $0.63 per share. Excluded from the guidance is an estimated restructuring cost of $25 million, most of it being non-cash for reductions in manufacturing and distribution in all segments. Our restructuring efforts this year will reduce our fixed costs and should have a payback of just over one year when fully executed. Over the last 12 months, we generated free cash flow of almost $500 million during the severe recession. Each of our businesses is managing the balance sheet to maximize our cash position, reducing expenditures, and remaining focused on our customers. The investments in our product systems and organization will make the business stronger and more competitively positioned as the economy improves. At this point, we will take questions.

(Operator Instructions). Your first question comes from the line of Michael Rehaut of JPMorgan.

Hey guys, this is actually Ray Huang on for Mike.

Good morning.

I will drill down more on the Unilin margins there. They are up very strongly both year over year and sequentially. Just wondering if you can provide some additional color there, what drove the quarter? Then looking out to the back half of the year, given the European holiday and potentially customers trading down, if they continue to make a mix shift, how do you see the margins playing out there? And should we be expecting a sequential decline there or can you guys maintain that double digit margin in Unilin?

Let's see if we can answer that for you. We started out in the first quarter of the year with the sales level down in the period as well as declining, reducing the inventories in the period. As we came into the second quarter we had higher [plant] operating levels, which helped with the sequential volume improvement that went along with it. During the quarter we also had -- or were able to reduce some of the marketing and maintenance expenses which we pushed out, which some of them will hit in the third quarter and impact the third quarter results. In addition, we had some lower raw material costs in the quarter and signed some new licenses as well during the period.

As we look forward, we don't believe we can sustain these unusually good results that we had in the period. What we believe is that the third quarter is going to be -- have to struggle with the holiday impact in Europe, and making the assumptions that the volumes will impact more than usual and the downtime because of the inventory levels and normal other things will be run less. So we will run the plants less than we had anticipated in the second quarter. In addition, we are assuming there is continued pressure in market pricing, especially in the board part of our business. And then we talked about the cost for marketing and maintenance costs being pushed in the second quarter and some of those falling into the third. Then the royalties which we get, we're assuming the industry volumes will continue under pressure and impact those. So we think that the margins sequentially will not be able to be maintained at those high levels.

Great. That's very helpful. And a follow-up question to that. On the Mohawk margins, on the flip side those came in a little weaker, than our submits. Maybe you are getting more raw material benefits in the quarter, given your commentary that raw materials are expected to be flattish or rise slightly in the back half? So you're expecting margins to be in that low single digit range for the rest of the year?

There is going to be continued pressure on the margins. There's a chance the margins could improve a bit as we move forward in the segment, as we get the cost that we keep cutting out of the business that reducing the costs. So we are hoping we will be able to see improvement, but there is still a lot of problems with the industry volume going down. We are trying to adapt to the unabsorbed overheads, but we're spending a lot of cutting those costs. The same thing with all of the businesses -- there is the mix trading down, which -- the customers are using lower priced materials, which is impacting the margins. But we think all of the cuts and costs we are doing is helping the profitability to go forward.

Great. Thanks, guys.

You're welcome.

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

Good morning, everyone.

Hi, Dave.

Good morning.

Jeff, you were talking about SmartStrand and talked about the fact you stressed your supply channel this quarter. I guess I'm wanting to get your sense of whether you are becoming at all concerned about your suppliers rationalizing capacity at a time when everybody is cutting costs and capacity? Will we have supply channel tightness that could lead to greater than expected raw material cost, pressure over the next two or three or four quarters?

I don't believe so. There is so much excess capacity -- the industry's off at 40% from a peak, and then some of it shut down. There's mix changes going on. But I don't see any significant shortage of the capacity from there. It's more going to be related to the oil prices and the world market in chemicals, and so far I haven't predicted those too well, as near as anyone else. I don't know where they will be.

I mean, normally I wouldn't even have focused on the fact that you mentioned that you stretched that supply channel. Is there something odd going on there that was unique to this quarter?

Well, we have a relationship with DuPont. It's a niche business with them. We are their only customer in the residential channel, and we try to manage our sales level to their infrastructure. Our business picked up a little bit more in the category than we anticipated. And so we just had to adjust to it. They had another plant in China, and so we have been shipping stuff between those, starting to. But it takes awhile when you are in China and rearranging the piece to get the supply level up.

We will be in good shape with that when we get towards the end of the year, third or fourth quarter timeframe.

We don't perceive it as ongoing profit.

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

Good morning, everyone, and good quarter, guys. Your overall improvement in margins is impressive in the face of weak sales. And I think in your comments, Jeff, clearly you are saying sustainability of Unilin is not likely to be realized in the face of the challenging environment you're in. I think when you look at the outlook for 2009 and into 2010, realizing you got lots of headwinds. Would you prioritize for us with respect to the challenges of the market where you see the greatest risks? And then talk about the areas where you think we can see surprises on the upside, maybe being new res versus commercial? And within commercial you mentioned education, government, and healthcare. Roughly speaking, can you break down sort of the buckets and how you guys market and prioritize your business mix?

Our business mix -- the commercial business is really the biggest wild card at the moment that -- how far it's going to decline, how fast it's going to decline and the timing of it, we have no idea. We are just trying to prepare ourselves to adjust to it as we go through. And each of our businesses -- Unilin basically has almost none in that area. So the impact is on the carpet businesses and the ceramic business. And those, too, the ceramic business has a much higher percentage of commercial, which has served us well over the past couple of years. As it goes through, it will impact it more as we go forward.

With each of those, we are trying to adapt again to the climate. And the restructuring costs that we are doing, we are doing across all of the different business segments, trying to reduce the infrastructure to the business to get them in line with where we perceive will be needed the next few years, and get them cut back. We've spent a lot of time -- I think we've done a good job of cutting our SG&A costs and pieces as we come down, and will still stay behind it because we have a hard time projecting out how bad it's going to get. We are behind the curve, but we think we are getting better at it and closer with it.

On a forward basis other than that, I think the raw material costs look like they will be fairly stable overall at this point. We don't see any dramatic changes. There is some upward pressure that we see because of oil on the carpet side, [the island thing] that we think will be reasonably stable.

Then the other big risk is the competitors in the marketplace and how we all react relative to the marketplace and the impact on pricing pressures. I have to say that so far we've been relatively -- that we as a company have been disciplined and we hope the marketplace doesn't get crazy. So far, based on history, it looks like we are all doing reasonably well given the environment that in.

The upside -- we try to be as optimistic as we can in our own forward projections and given the limited forward view we have, we make our best guesses at the peak and I think we have done all these things. I think that somewhere along the line, the existing home sales seem to be turning more positive. The interest rates are still low. So the question is, is there a point at which the remodeling piece moves up? And the upside is that it happens sooner than later, and it's anybody's guess it should have a positive effect on the industry capacity. And I think the industry changes, our cost structures will be larger than they were two years ago. And I think as the business improves in the future, I think we are well positioned.

That's helpful. And on a follow-up with respect to mix, you mentioned customer continues to go down price point and looking for more value. Roughly within residential, with Dal-Tile obviously it's a higher end ceramic choice for the consumer. What would you say the mix is from a I guess low end value oriented product versus the mid to higher end if you had to categorize the residential piece for the whole company.

The question is -- not sure I understood what you wanted to know.

I'm trying to understand what would you perceive to be a high end product mix or mid to high end versus your low end product offering? Because there are products within the family of offerings that are considered to be mid to high end. I don't know how big it is.

Depends where you draw the line. Typically we all talk about commodity products, and commodity products are basically the opening price point of the piece. And depends upon which business -- they could be 20% to 40% or more of the volume, just what we consider the bottom opening price points, depending which business and which channel, and keeps going up from there. And we make higher margins on the high end pieces. On the other hand, we have higher SG&A costs associated with it. So as the mix comes down, we do lose margins when the customers trade down.

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

Thanks very much. I was wondering if you could talk about your plans in the Unilin business. You were talking about more of the value product. In the past you talked about trying to stay away from the low end where it's more commoditized. Can you give your overall strategy in terms of the other product focus there?

Sure. Historically there is an opening price point that lowest value provided in the marketplace provides, and our Unilin piece is a very small portion, close to zero of it. We still have -- our goal is really not to become the low price leader in the marketplace, because we have so much more to sell than price. On the other hand we are introducing products that we think add more value that sit right above that category that bring more to the marketplace. We can get added value for them. But it allows us to participate in markets that we are not in. At the same time, in both Europe and the US, we are looking at broadening the distribution through using multiple brands to get to the marketplace as well as going through different distribution channels. Again, with not the goal of being the leader in the commodity price point.

Thank you very much. And one other question. You talked about the initiative in terms of working with the builders, certainly you hadn't done as much there. How large an initiative do you think this could be? Can you describe that? That would be great.

We always in the Dal-Tile business had a large builder business. But what we are trying to do is expand our relationships with the regional and national builders. Even though the timing is at a low level, we think it will help us in the future. We have put together additional programs in the -- historically both the Mohawk brand and the Dal-Tile brand had gone through after the ceramic part of the builders. And what we have done in the past year or so is focused the ceramic business through the Dal-Tile brand to those accounts. And we think we can bring them a broad selection that will offer them value and increase our business and penetration into the marketplace. And we are having good results.

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

Good morning. It's actually Susan for David.

Good morning.

Going back for the product mix, can you talk a little bit about how you think in terms of your promotions? Are there any promotions that helps move people back up the price points at all? Or helps get them back into the higher margin goods?

I hate to admit it, but most of the promotions are value oriented in this marketplace. The customers are driven by trying to attract consumers in their stores, and so they are tending to use price across the board and they tend to expect you to help support them do that. At the same time, we try a lot of things to raise the customers up. We talked about our SmartStrand. We talked about the new branding strategy on the Wear-Dated brand. We are bringing different brands as well as different product innovations to the marketplace to improve the marketing value to the store as well as the customer. But in general, the marketplace is moving down as people are trying to conserve their capital on an individual basis.

Okay. And then can you also just talk a little bit about -- as you think about continuing to take costs out of the business, how you think about the tradeoff between your longer term goals and your near term needs to take costs out?

There is no simple answer to that question. What we try to do is look over what the present needs are. We try to say how far can we reduce them before we impact negatively the long-term viability of the business. That with that, as the volume goes down, we have fixed infrastructure costs that are hard to take out. The labor pieces -- we tend to be fairly good at raising and lowering those as the volume goes up and down. We believe that most of the labor pieces that we can add back over time and fill it back in, as long as we maintain the infrastructure. And dealing with the fixed pieces, you hear us taking restructuring and writedowns to consolidate facilities and write off assets.

Many cases this has forced us to become -- the downturn has forced us to become more productive. And we are getting more out of the present assets, which will allow less assets to be used to support a much higher level of business in the future than it has in the past. There are no right answers to how much. And every time we do it, we look through, and if there weren't any questions, we would have cut it where it is today two years ago. As we keep seeing how the business is changing, we keep adapting to those changes. And it has an estimate of -- we are assuming now it's going to be at least -- not jump back to the level it was two or three years ago overnight. So we think that we can build it back as it recovers.

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

Good morning, this is Mark in for Eric.

Good morning.

First of all on the pricing environment and the fact that carpet margins were a little bit softer than the mid-single digit range you would have expected in the second quarter, can you talk at all about any incremental pricing pressure within carpet? And then the fact that you're seeing your [ROS] go up in the second half in that segment, your ability to get further pricing from here?

First, we are trying to increase our margins in the segment. We think the cost we taken out of the business and the levels we will be able to run at in the third quarter will help those, unless we get some unusual surprises. So we think those will help margins in that category a little bit as we go forward. I mean, it's a difficult environment. Weighing how much price you can get versus the marketplace is dependent on the competitive situation you react to, the combination of your own needs as well as the competitive marketplace.

At this point, I can't tell how much the raw materials are going to change over time. It just looks like they will go up a little bit and just wanted to make you aware of it. It's not a surprise as we see it. And most of that is just based on how we perceive the chemical and oil prices. As you see, from week to week it's changing 10% to 15%. I don't know where it's going to end up. I don't know what else to tell you.

In terms of demand, the stability you are seeing within residential, are you seeing your drops in residential become less worse? Or just not getting worse? How should we think about the statement about residential as we move into August?

We are really looking at it more on a sequential basis. On a sequential basis, it looks like maybe we bottomed out, and the question is, we don't know what it's going to be next month any better than you do.

The rate of decline looks like it's maybe stabilized. That's the way we are trying to do it.

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

Good morning, how are you?

Well. How are you?

Living the dream. Couple of questions for you. First off, this is more just a housekeeping. Nice job both in earnings and also in the inventory management. The inventory was down sequentially in dollars. Was that down in yards or units also? Or was that an impact of the lower input costs?

I would guess it's some of both.

Okay. And second question would be, if we could just get you to clarify specifically Unilin's margins expectations for a Q3, you said it would be lower and this would be unsustainable. We are trying to get a sense by how much or approximately or by -- if there is some sort of quantification to help us model it.

Good try, but historically we have not broken down each of the segments. We are trying to get you at least a method to guess at it to get you in the ballpark with our estimates. I don't know how to give you more than that. Our estimates aren't right, either. The further we break them down, the worst they get.

Your next question comes from the line of Stephen East with Pali Research.

Good morning, guys.

Good morning.

If following on Megan's question about cost structure, if I ask it a little bit differently, if you look at the pullouts that you have taken to date since this downturn has started, how would you -- relatively speaking, how would you characterize those between permanent structural pullouts versus just purely volume related pullouts?

I don't know if I -- I'm not sure we would look at it in that fashion. Basically we have lowered the labor force somewhere around 20% in a piece. We have cut all of the overtime pieces. And we have been able to cut the costs through productivity improvements in pieces. We are working short times and those things in the labor piece, so besides the 20% that's gone, there is another significant percentage that is much lower than it was. I don't know whether to call those temporary or permanent. They're both. You can change them back the other direction with limited time.

The facilities -- we have shut down the high cost facilities in all of the various businesses. We continue to have more restructuring in the third quarter that we are going to reduce some more infrastructure. We have cut our distribution pieces significantly. And what happened is prior to the downturn we were building distribution to accept a much greater volume of business. So what we had was exceeding our present needs. We are writing those off. We are consolidating those. We are in the process of consolidating some Dal-Tile and Mohawk distribution pieces. The Dal-Tile business -- we have service centers around the country where we have multiple ones in the same marketplaces, and in some cases when the leases allow us, we are consolidating them to reduce that infrastructure. We reduced the people in the infrastructure while -- the Dal-Tile SG&A.

What else? The longer term, the things that will be needed in an upturn will be more ceramic capacity. We're looking at capacity in the Mexican market to supply the Mexican marketplace. We will need more capacity to support the US marketplace long-term. And the short-term, we have always used the world marketplace of manufacturing to support our needs in ceramic. So as the industry turns up, we had as much as 30% to 35% being imported to support the business. And now it's down in the teens, but it's more directly related to the unique product category.

We have the capacity to support our Unilin business and Mohawk businesses for the most part. And then we will look at other expansions. We talked about Russia, that we believe in order to have significant portion of the Russian marketplace we will have to make investments in Russia at a point in time. We believe possibly we can use some excess equipment that we have and do it relatively inexpensively and get in that marketplace to support it. Those will be the major investment needs.

Okay.

As I think turns up which, I think, tries to answer the question a little different.

Okay. That's helpful. Over the last year or so you have been trying to implement price increases as you saw the raw materials going up. You obviously had a mix shift down and we get that. Can you shed a little light on what you are seeing on the pricing front and have you been able to hold prices? I know it takes a while for you to get them implemented. Has that basically -- that effort disappeared or where do we sit with it?

Again, you have to look at each of the businesses. In the carpet business, the commodity areas which you would expect have had pricing pressure and give back in the pricing of the commodity products. You get above the commodity products, for the most part the pricing has been reasonably stable across those.

The Dal-Tile piece I think more pressure has been on the mix rather than the pricing. Dal-Tile historically did not play a large part of the business in the commodity. They had a commodity business, but they limited it to match the capacity and to provide the product mix to the customers they were dealing with. But they didn't want -- they didn't use it as a large part of the business. As the volume has dropped off, we have taken more of the commodity business. It's more of a mix problem in that aspect.

And then Unilin tends to play in the mid to high end places with very limited amount there. Where we have gotten hurt in the Unilin business is the excess board capacity that we have. Those businesses, as we said before, there is a significant excess capacity in the marketplace, and those selling prices have gone to close to cash costs in the European marketplaces. It will take the closure of the high cost businesses to get it up a little bit. But then you have in those same businesses, when business picks up, you can expect a significant change in the selling prices at some point.

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

I know usually disclose your unit growth by segment in your 10-Qs? Can you give us a sense of that now or at least talk about the direction?

I don't think we have that in front of us. If you want to call me back later, I can talk to you about that. It's going to be in the Q.

When you talk about the residential demands stabilizing, is that the Mohawk segment or is that across all segments?

That's across all the businesses. It's the sequential volume that we are doing. It looks like possibly that the sequential volumes may not be going down any further.

Except I assume for the seasonal downtick you see in the laminate business?

Seasonal things you will have. Going from second quarter to third quarter is where we assume the seasonality of the industry, we are not going to change.

Your next question comes from the line of Carl Reichardt of Wells Fargo.

Hey, guys. A follow-up on the residential question. Has there been a difference in trend if I look at the different distribution channels you have? Is there difference this direct to builders versus the big box versus the traditional small retailer that would give us a sense if the residential improvement is more related to remodeling or new?

The new, there is not much new going on.

Getting better -- ?

I think what the new is that it's reached a point -- I think we are building 300,000 homes a year, and so it's flattened out at the bottom. So I don't believe it's got any further to go. It's down at the bottom. And it appears that possibly the remodeling piece may have hit the same bottom, too.

Okay. And the second question related to Unilin and the royalties. I just -- out of curiosity, the royalties -- are they tied directly to the volume that those who utilize the technology are producing? Is there a fixed payment component of the royalties, or something in the timing of the accrual of them that would have impacted the margins directly this quarter that we wouldn't see next quarter?

We have different arrangements with different groups of every type you can imagine. But a significant portion of the total is based on industry volume. And it's going to go up and down with the industry change.

The other thing that will impact us from quarter to quarter, as Jeff mentioned earlier, is when we sign up new licensees and we could have some one time nonrecurring royalty revenue that we might not repeat.

Understand. Thank you very much.

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

I wanted to drill down more on the carpet side. There's a lot of moving parts. I'm curious as to where you rein in capacity in the first half of the year. You have been making changes all along in capacity bringing that down. Where do you expect to run, say in the second half? Or are you bringing inventories down in carpet as well, so that even if we saw flat volumes going forward, you would run at better rates? And what's the interplay in volume with commercial still going down sequentially and residential flattening? Do we still see lower overall unit sales sequentially of carpet? I know that's a longwinded question. But I'm driving at where you can get those margins to in terms of utilizing your plant in light of the fact that mixes are down and volumes are so depressed?

I think if you look at the first quarter to balance of the year, the first quarter was finally operating 10 to 15 percentage points below. As we go from the second quarter into the third quarter, we are assuming we will run it similar rates, plus or minus a little less whatever we shut down in places. In the second quarter, we shut down a European laminate plant. In the third quarter we have some plants that aren't fully executed, so I can't go through the details with you. We'll be glad at the end of the quarter to detail it. But we will take out some capacity as we come out of the third quarter.

When you look at Mohawk, Jeff, if we were say a year from now and we ran volumes sequentially flat for the next four quarters -- given what you have done to date, assuming everything else stays the same, mixed price, raw materials -- would we be looking at a material lift in EBIT margins given all the costs you taken out, on I guess it would be SG&A as well as manufacturing costs? Thank you.

I mean, the margins -- the costs should be down for the things we are doing and the margins will be based on what happens to selling prices and raw materials in addition to that.

Thank you.

Your final question today comes from the line of Keith Hughes with SunTrust.

On the SmartStrand, how much does that represent of the carpet business right now?

It's a niche product at the bottom. It's not in line with the top three raw materials, which would be nylon, polypropylene, and polyester. But there's a growing niche for the piece. Again, it used to be considered polyester, and with the government change they made a new product category out of it.

Still single digits are the volume you are doing?

Still limited part of the total.

Second question. You referred to $25 million of plant and cost reduction charges in the third quarter. Within the Mohawk segment, what things would you be doing in the third quarter there?

Reducing manufacturing capacity and reducing distribution capacity and infrastructure.

Manufacturer's capacity -- are you taking out testing and extrusion or getting rid of the spending mills and things like that?

I'm really hesitant to walk you through the pieces because they are all not finalized or executed at this point.

We could talk more about it as soon as we announce it.

Ladies and gentlemen, we have reached the end of the allotted time for the question and answer session for today. I would like to turn the call over to Mr. Lorberbaum for closing comments.

Thank you for joining us. I think we are making a hard decisions you have to make to run the business in the atmosphere we are in. And I think we will be a better off company a year or two down the road when the industry improves and we will have our cost positions much lower and leaner. Thank you for joining us.

Ladies and gentlemen, this concludes today's conference. You may now disconnect.