莫霍克工業集團 (MHK) 2009 Q4 法說會逐字稿

Good morning. My name is Krista, and I will be your conference operator today. At this time I would like to welcome everyone to the Mohawk Industries fourth quarter 2009 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks there will be a question-and-answer session.

(Operator Instructions) As a reminder, ladies and gentlemen, this conference is being recorded today, February 26, 2010. Thank you. I would like to introduce Chairman and CEO, Jeff Lorberbaum.

Good morning, and thank you for joining our fourth quarter 2009 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.

Thanks, Frank. Our fourth quarter earnings per share of $0.29 were better than we anticipated. Earnings per share were $0.56, excluding restructuring charges, primarily related to infrastructure reductions in our Mohawk and Dal-Tile segments. Our restructuring activities included a $30 million charge in the fourth quarter, and we expect to record another $5 million in 2010, to complete the equipment relocations from these initiatives. Our earnings exceeded expectations due to cost savings efforts, personnel reductions, and restructuring activity.

Fourth quarter sales were $1.3 billion, a 9% decrease from 2008, or 11.1% on a constant exchange rate. Our balance sheet is strong with cash, over $500 million, free cash flow of almost $570 million for the full year, and a net debt to total capital ratio of 26%. Sales were slightly lower than the third quarter, as the Residential business began to stabilize, and comparable periods were lower than last year. The overall economy continues to improve, with 5.7% growth in the fourth quarter, improved consumer confidence, and the housing market showing better results.

The Commercial sector is under pressure, due to lower new construction, and delayed remodeling activity, as corporate profits have declined. This year Commercial will continue to decline and should reach a bottom. Our European business is impacted similar to the US, and is showing some signs of improvement.

We believe the economic recovery should positively impact our Residential business later this year in both the US and Europe, offset by a continuing decline in the Commercial business, which lags behind the economic recovery. Frank do you want to give the financial report?

Thank you, Jeff, and good morning, everyone. As Jeff had mentioned our sales finished at $1.3 billion, or 9% down from last year. This is the first time in five quarters that we have seen our decline in the single digits. All segments are down except Europe, due to volume and price mix. Sales are down 11% on a constant exchange rate basis overall.

Our gross margin was 25%; however, excluding charges of $22 million in cost of goods sold our margin was 27%. The improved margin was due to infrastructure reduction, lower raw material costs, and ongoing cost cutting actions. Our SG&A was $295 million, down from last year.

Excluding restructuring charges in the quarter of $8 million, the SG&A came in at $288 million, or 21.3% of sales. We incurred $30 million of restructuring charges during the quarter, of which $20 million were incurred in Mohawk, and $10 million in Dal-Tile. These were primarily related to manufacturing, and distribution. The operating income at $77 million, excluding charges, was 5.7% of net sales.

Overall, our results were good, in a very difficult environment. Interest expense was $35 million, higher than last year, due to the new bank facility that we put in place earlier in the year. Our other expense was lower at $1 million than last year's $18 million, due to decreases primarily driven by changes in the exchange rate. Our tax rate for the quarter, excluding charges was 5%; however, looking into 2010, we are expecting a tax rate in the 15% range. Earnings per share, excluding charges, came in at $0.56 a share.

If we jump to the segments, starting with the Mohawk segment, sales were $739 million, or down 8% from last year, due to lower volumes and changes in mix. As we mentioned earlier, we believe Residential is at the bottom, and the Commercial segment is still declining. Operating income, excluding charges, was $36 million or 4.9% of sales. The margin performance was driven by lower raw material costs and reduction in expenses, offset by decreased volume levels.

In the Dal-Tile segment, sales at $330 million were down 20%, with Residential and Commercial both declining, while Mexico continues to perform well, was slightly ahead on a constant exchange rate basis. Operating income in this segment, excluding charges, was $21 million or 6.4% of sales. We were benefited by lower freight, energy, and other costs, offset by declining volumes, negative mix, and deleveraging from our fixed distribution cost in this segment.

Unilin sales were $298 million, up 2% from last year, with Europe, which is primarily Residential, stabilizing. Sales on a constant exchange rate basis, however, were down 7%. Operating income was $25 million, or 8.3%. We had lower freight costs and operational savings that were offset again by decreased volumes. The exchange rate impact was favorable on the margin, by $3 million.

Turning to the balance sheet, we finished strong at the end of the year with cash at $531 million. This includes $465 million in cash investments, with $367 million of that investment in the US. We believe our strong cash position, plus additional generation of cash this year, will put us in good shape to pay off much of the $500 million of bonds that are due at the end of this year.

Our receivables were $674 million or 51 days, which is up from last year, our aging however remains in good shape. Included in the receivable number is $72 million related to a tax refund receivable that we expect to receive in the first half of this year. Inventories were $893 million. They were down both sequentially and year-over-year, with turns at 4.0 times. Our fixed assets ended at $1.8 billion, and included capital expenditures during the quarter of $38 million, and depreciation and amortization of $82 million.

For the full year, CapEx was $109 million with D&A of $303 million. We are estimating CapEx this year in 2010 at $150 million to $160 million, and we're estimating D&A at $300 million. The CapEx estimate includes approximately $50 million to $60 million of strategic investments for expansion in the new geographic areas and new products.

Our debt finished the year at $1.855 billion; however net debt, after deducting cash, is $1.323 billion. The fourth quarter free cash flow was $222 million, and the full year free cash flow was $563 million. This was a result of the good job our management team did in controlling expenditures. Net debt to EBITDA came in at 2.2 times.

Our tax strategies that we put in place during the year generated about $40 million of tax refunds, earlier in the year, and in addition we were able to bring over $127 million out of Europe into the US to help us pay off our bonds. I will turn it back over to Jeff.

Thank you. During 2009, we continued to take aggressive actions to reduce our infrastructure and align the business with industry demand. In 2009, we closed all or part of 16 manufacturing facilities and 27 distribution sites, to reduce capacity, improve efficiency, and lower costs. We reduced personnel by about 4,000 and warehousing by almost 4 million square feet. In addition, in the period we've restructured selling and administrative areas by reducing sales personnel and management, consolidation of order centers, better control of sample expenditures, and eliminating low value activities.

Compared to last year, excluding cash, our working capital was reduced by over $370 million, and capital expenditures were cut to $110 million. In 2009, Mohawk generated significant operating cash flow of $670 million, or 12% of sales during the year. The $500 million of bonds due in 2011 will primarily be paid with cash we accumulate.

In spite of this very difficult environment, we are strategically positioning our Company for the future. The business has been realigned to current economic conditions. New products have been developed in all segments to enhance our sales and marketing position. Our expansion outside the US continued, as we grew our geographic participation of Mexico with ceramic tile, laminate in Russia, and wood flooring in western Europe.

We continue to enhance the sustainability of our products and manufacturing to minimize our impact on the environment. Mohawk was recently recognized as a leader for environmental efforts by Newsweek. They ranked Mohawk for sustainability in the top 15 of the Consumer Products category.

Our Mohawk segment sales were down 8% which is better than the industry. We are continuing to streamline the business, while reducing the infrastructure and costs in this segment. In the fourth quarter, we have closed and restructured multiple carpet manufacturing operations, merged our backing facilities, combined carpet and ceramic distribution warehousing, and reduced management staffing levels. With improved processes and better discipline, we have increased our quality and yields in most product areas, and reduced logistics costs.

With operational changes and plant consolidations, we are reducing complexity across the segment, which is lowering costs and inventory. We have reorganized our customer, product, and logistics management, and implemented new systems to enhance our service levels and costs. In the first quarter, we are implementing a price increase of 4% to 6% to recover raw material cost inflation.

Our regional shows have been successfully completed and our customers are optimistic, though only limited retailers have actually demonstrated an improvement in business. Our proprietary SmartStrand product, using triexta fiber have achieved broad consumer acceptance in the marketplace as a high value alternative to nylon and polyester, due to superior softness, enhanced performance, and easy maintenance.

In Residential, we are expanding our new EverStrand extra soft polyester, for the price conscious, and our SmartStrand and WearDated collection for the higher value customers. We have expanded our value oriented hard surface products to fill specific regional needs, and added unique wood, laminate, and vinyl products for the style and value conscious. Additional product placement should improve our overall position in the Home Center channel this year. The Government health care and education end markets remain a focus for Commercial growth opportunities.

Our Dal-Tile sales were down 20% during the quarter. Dal-Tile continues to out perform the industry, with our broad product offering and market saturation. The Commercial industry decline is impacting Dal-Tile more significantly than our other segments. Our leading design, superior quality, and extensive distribution infrastructure distinguish us in the market.

We continue to refocus our sales efforts on the Residential channels, which should recover before Commercial. We are introducing more value oriented tile products in the Residential market, and we recently began limited marketing of a new patented ceramic tile technology, which can be clicked together without using grout for simple installation. We are gaining share, with increased product placements and promotional commitments in the Home Center channels.

In Commercial, we introduced more value products, coordinated collections, and sophisticated color body porcelain, and limestone concrete, and wood visuals. We have also introduced a new technology for Commercial we call OutStand. It has 60% recycled content, a more durable surface, greater stain resistance, and antimicrobial protection. We have launched an advanced finish for stone, that protects against staining, bacteria, and makes it easier to maintain.

In Mexico, we've grown our ceramic sales on a local basis, while the market declined last year about 9%. We accomplished this by expanding our product offering, customer base, and commercial specifications. We're also implementing a 4% price increase in this market. In the future, we will require additional production capacity in Mexico, to support our growing distribution.

In the fourth quarter, Dal-Til is continuing to reduce costs throughout the organization, with lower staffing and infrastructure levels. We closed our Dallas ceramic tile manufacturing and a quarry tile line to improve our efficiencies and lower costs. Our logistics operations have closed or reduced seven distribution points, utilized lower transportation cost modes, and increased direct shipments with large orders. We are in the process of implementing new internal systems for both our major warehouses and local service centers. We're about 50% complete, and are seeing improvements in customer management, working capital, service, and productivity.

Unilin sales improved 2% as reported, or declined 7% on a constant exchange rate. Our operating margin for the quarter was 9%, and our EBITDA margin was 22%. Although business conditions remain difficult in both Europe and the US, we believe the laminate and wood products may have reached the bottom of the cycle. We believe the European market may improve more rapidly than the US, since European customers rely less on credit, and housing has not contracted as severely.

We are pursuing multiple strategies to maximize our laminate sales, including new product introductions at lower prices, additional technological innovation, geographic expansion, and increased business in the DIY channel. We plan to developed additional business through the distribution we acquired in the UK in 2009. Continued growth of our European wood business, with an expanded product offering, and increased presence in Russia with local manufacturing. We introduced lower priced laminate products, with enhanced styling, a new edging process that creates more realistic visuals, and a patented scratch protection, which has been added to a significant part of our overall product line.

Demand for our board products was depressed during the fourth quarter, and prices have declined due to excess capacity in the markets. Currently, demand in Europe is improving for our board products, which will increase utilization rates in the first quarter. Increases in board prices are being implemented, but they will lag cost changes in the first quarter. We have started marketing a new wall board product that uses our patented click system.

Production of our new installation boards is beginning, while we obtain additional technical certificates for the individual markets. Over the next couple of years, installation boards will provide another value-added niche category for our Unilin segment.

At Unilin, we have also implemented many cost reductions to lower SG&A, reduce manufacturing costs, and manage inventory levels while further investing in product innovation. The first quarter is seasonally the lowest quarter of the year. The Residential category should improve through the year, while the Commercial business faces significant headwinds. We are implementing a price increase in carpet and wood products to offset the rising costs but the lag will negatively impact the first quarter. As the economy improves, raw materials should increase more, and additional price increases may be required.

Total interest costs in 2010 will be higher from rate increases and our new agreement. Mohawk's consolidated results in the first quarter will be negatively impacted by a weaker euro. Our first quarter guidance for earnings is $0.10 to $0.20 per share, which excludes any restructuring charges. This year, the first quarter will include four more shipping days than 2009.

The economy improved in the fourth quarter, and continued growth is expected throughout 2010. After our seasonally slower first quarter, future periods will improve as we move through the year. The improvements we have implemented, and the realization of price increases, will benefit us in future quarters.

We have just been through the most difficult economic decline we have ever experienced in the Flooring industry. As we come out of this cycle and return to a more normal environment, we will be a better Company, with an improved management team, a better balance sheet, lower leverage, and a much leaner structure. We believe the Company is well positioned for good earnings growth and to increase shareholder value in the future. With that, we'll be glad to take questions.

(Operator Instructions) Our first question comes from the line of Dan Oppenheim from Credit Suisse. Your line is now open.

Great. Thank very much. Just wondering if you can talk a little bit more about the Dal-Tile segment in terms of the margins there. And you talked about the negative mix impact into the Commercial. As you think about it going forward, how much in terms of the new product introductions there do you think can sort of help the margins in that area? How much is just the overall Commercial environment going to be a drag on that, just if you can talk about that business?

As with the rest of the business, the sales are down significantly, at about 20%. We believe the ceramic industry is down in the mid-20s, and we have done better than that. We are suffering in the same mix decline everyone else is, that the customers are trading down in product.

At the same time we are more aggressively going after lower price product sales to run the facilities than we normally would. You see the distribution system that we have that really provides dramatic market advantages, and it has allowed us to have as large a market share as with we have, but that continues to have a negative leverage on us, because we can't decrease the costs of the distribution as rapidly as the other.

Looking forward with the pricing, we are trying to do the most we can to put us in place to maximize our Residential business over the next 12 months because we think that it will turn more positive. We continue investing in new products and innovation to drive the business there. The Commercial we believe is still going be a drag on the business throughout the year. And it is really a question of how fast the Commercial declines and the timing of it, and the timing of the improvement in Residential and how it is all going to balance out during the year.

Great. Okay. Thanks very much. I was wondering also about in term of the thoughts on cash flow, you've done a great job with the cash flow generation, as you think about 2010 you have talked about the debt, but also, as you think about acquisition opportunities, where would you look a that in terms of geography, or where do you think the product line would most benefit?

I am not sure about your question, Dan. Are you asking about strategic initiatives geographically, or what cash flow is going to do?

Well, based on the strong cash flow generation that you've had, what would the priority be in terms of just the balance sheet versus the thoughts of acquisitions here?

I think our primary focus right now is to continue to focus on the balance sheet and pay down debt. We have got this $500 million payment that's coming up at the end of the year. A I mentioned earlier, the cash, between the cash we have got on the balance sheet now and what we think we will be able to generate this year, we should be able to pay a substantial amount of the $500 million down with cash that we've got, and then maybe roll over a little bit of it in our revolver, but our focus is continuing to be primarily on strengthening the balance sheet.

With that we have the plant we are going to put up in Russia we are going to invest in; we are behind where we thought we would have been a little bit, because we actually had a site picked out and the seller backed out. So think we will execute that this year. We are looking at other things, but I don't know if they will come to fruition or not in other markets and places.

We talked a little bit about the ceramic business in Mexico. As our business grows there, we will need new capacity. At this point we probably won't start the plant until way late in this year or next year, so it won't have much of an effect on the cash this year. And then we continue to look at other opportunities as they come up.

Great, thanks very much.

You're welcome.

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

Good morning, Mike.

Good morning. Thanks. A couple of quick questions. First, you mentioned the 4% to 6% price increase, that was something where last quarter, there was a delay in that area, and I was wondering if you can give us any color in terms of your level of confidence there, if you have received any initial feedback, and what that might mean let's say if it is fully implemented, in terms of a cost recovery, marginalized on the carpet segment in the second quarter.

At this point we are knee deep into it. We are aggressively implementing it throughout the marketplace. As usual, it will take some period to implement through all of the different channels and the timing. It does appear that it is going through the market.

As usual, we won't achieve all that we stood out to do with the 4% to 6%, so it will end up something less than that on average. We still have the mix changes that are going on in the business, which is impacting the average selling price, as we sell customers, lower value products or lower cost products to try to maintain some of the price points. So I mean all is going foward; all indications are that we will execute it.

Okay. Great. And second, on the laminate strategy, you continue to talk about doing things more perhaps lower end, then you just mentioned greater volume and throughput. Do you have a sense of, given the changes in margin over the last couple of years, what type of impact that might have for 2010 as you see some of that strategy realized?

They have two separate pieces, one is the industry, the mix that's changing in the industry that is going on, and a compression of margins in various products that we sell in the marketplace is one set of problems, which the whole industry has. The second is that we have primarily focused our business on the medium to high end of the business, by maximizing the value of the innovation, which we spend a tremendous amount of time creating in the marketplace, and what's happened as we go through this cycle, the lower price points and value have become more important. We have reduced the pricing of some of our products and introductions in the marketplace to do that, and we think that we have to take a more aggressive stand in participating in the DIY channels than we have been.

We are doing it across all geographies, and we don't have a single strategy, it is customer specific, and geographic specific to meet each market. It will be at lower margins than our historical business. On the other hand, we are expecting, as the cycle goes through, for the higher price points to be improving sales, as we go forward. We have always said that over the long term we had expected our margins in the category to decline from their original highs that they were at, as we keep expanding the marketplace. And this year I don't know if it will have a significant impact, because it takes a long time to change [each] strategy.

Okay. Thank you.

You're welcome.

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

Yes, good morning everyone.

Good morning.

Can you just recap for us, by how much have you reduced your costs since you began your right sizing?

I think SG&A is probably down from two years ago about $200 million, David.

Okay. And within COGS? The fix cost component, and what have you been able to pick up in yield on the variables.

It is hard to tell, given all the mix change in the products, and the different products and categories, I wouldn't even know how to give you a single answer that made any sense.

Can we talk about it from a fixed costs standpoint, what you think your fixed costs may have come down by?

I don't have that - - I mean I would say since we started, do you have any estimate on how many people we have reduced?

I think overall we have cut 25%, 26% of our work force across the whole Company.

Okay, maybe I can follow up with you afterwards, Frank, offline.

Yes, we could talk.

Just a follow up, how should we think about your incremental margins by segment in 2010?

The real question we have to answer in 2010 is what the volume is going to be. And as we have tried to analyze our own business, it really has got to do with how far the Commercial business declines, and the timing and depth of it, and then in our plans we are anticipating that the Residential business has hit bottom and will actually improve as we go through the year.

So depending upon the timing of those two pieces, is going to determine what the top line is going to be. We think we have put in place a lot of things on the cost side to reduce the cost structures, so the real question is going to be the volume related to the cost structures, and then if we get any surprises during the year over from raw material and commodity costs as we go through. We have proven that we can continually pass those through but as you go through these things, I don't know exactly where commodity costs are going be. Our estimates aren't good for one week in a row, let alone a year in advance.

It sounded like from your comments that you thought that your ability to fully recover cost inflation this year might be limited, just maybe from a timing standpoint, in that the price pass throughs are going to lag behind raw materials, and you thought there might be further raw materials later in the year. I don't want to put words your mouth, but does that speak to the narrower contribution margins in 2010?

First we started talking about the first quarter. In the first quarter we postponed the increase in the carpet side, so we are probably two months or more behind where I would like to be. So that is going to definitely impact the first quarter. We've had the wood prices we're raising up, they're going to pass through them, so what we're hoping is, somewhere into the second quarter, we'll get caught up with those. But then the next question is what happens with future increases, and I don't know whether they're going to come or not.

Just final question. You have down sized a lot. How should we think about full capacity revenue now for Mohawk and Dal? I think your peak Mohawk revenues of $1.25 billion per quarter, I think Dal had topped out at about $500 million per quarter, but there has been a lot of capacity reduction since then. I'm just wondering if you could help us think about, based on the asset configuration you are working towards, what would be a peak revenue?

We have taken out a lot of as assets and pieces; on the other hand with we have moth balled pieces. So we have the ability to push the sales level back up substantially before we hit a top. Each product and each business is a little different. The ceramic business, we used to import over 30% of our sales. So as we went down, we decreased the amount we're importing, so we could actually go back and start importing in between.

You hear us talking about an investment in Mexico, so as that starts up, the additional capacity can be pushed back to the US as we start it up, as we go through, at some point we go through the cycle. I don't think we are going to have a capacity limited problem, we are going to have a revenue limited by the consumers in how fast the piece picks up over the next few years.

Thank you very much.

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

Thanks, good morning everybody.

Good morning.

First question, Jeff, in your comments, it seemed like you were getting somewhat comfortable that 2010 was going be the trough in the Commercial market. I am just wondering what that is based on, and if you think there's some risks that a downturn in Commercial could last a little bit longer.

We gather all the same public data that you do, and we try to analyze it. Our people are under the expectation that [how it] possibly should end up this year. If you take that it declined somewhere in the neighborhood of 20% or more this year, you take another, pick another, mid teens, and say 12% to 15% next year, you have a 35% decline, we are just expecting that that might be near the bottom of it.

Okay. The follow up question I had was about the efforts to create more environmentally sound products and priced a little more attractive to consumers from an environmental perspective. And I'm trying to understand how you guys think about how buyers receive those products, whether you're able to charge a premium price, and whether that is helping you gain share, and really the question is are you able to charge some sort of premium for those kind of products?

You have to decide what channels you're going into. If you look in the Commercial business, where businesses are being pushed to be environmentally friendly, you can get a premium for those, and you can take different actions in order to try to do those. When you get in the Residential business, the consumers like them, they feel good, they want them, but there are limited price opportunities, so you have to be able to provide competitive alternatives at similar prices. On some occasions, it can have some marketing advantages, or some slight pieces, but you have to be able to do that at a competitive cost base.

Got it. Thank you.

Your next question comes from Ivy Zelman from Zelman and Associates. Your line is now open.

Good morning guys.

Good morning.

First just looking at the price action that you've implemented, and when we had the September price increase that the industry delayed or rescinded, part of it we understood was because of the new housing market was pushing back with (inaudible), not willing to raise prices as a new competitor, versus Shaw as your typical duopoly, and wondering if new construction with the home builders, will they be willing to accept that price increase, or do you not even go with them with the price increase, so that's the first question.

And then the second question just relates to the benefit, if any, that you may be seeing from foreclosure activity, as many investors and/or renters are starting to refurbish, or these lenders that become homeowners are maybe starting to refurbish these homes. And if so, if you can help us by shedding any light on that.

The raw materials in the carpet industry make up such a large percentage of the costs, that as they change historically, the industry has pushed them through, and we've pushed them through all the various channels with different timing with them. We are doing the same this time, and there is no channel that wants them and nobody likes them, so we're still in the process of implementing them. We expect them to be pushed through in the marketplace. The second question was - - ?

On the foreclosures, Ivy, we have a hard time determining where our product ends up, so we have a hard time - -

They all look alike to us; it is just another remodeling order as far as we can see.

Got it. And Stainmaster, what bearing would the Stainmaster now, exclusive with Lowes, is going to have on the industry in your opinion?

What you have is in the past year, as we keep saying, is there's a compression of the price points, and so as Stainmaster was positioned at the high end, they were losing share, so their goal was to try to improve their share in the marketplace, so they did that through giving limited distribution to one of their customers. And that's the strategy they have taken, and we will try to help the customer go in any direction he wants to satisfy his needs.

Okay. Thanks, Jeff, thanks, Frank.

Okay, you're welcome.

Your next question comes from line of Laura Champine from Cowen and Company. Your line is now open.

Good morning. Jeff, you mentioned that the carpet increase was postponed a couple of months in Q1. I know that at the end of the year, both you and your competitor were talking about really needing a price increase as soon as possible. What changed to push that increase back?

I think you misunderstood me. It got pushed back in the fourth quarter. We had originally tried to do it a couple of months earlier, and it got pushed back. One of our large competitors didn't like the timing of it, so the Company postponed it, and we followed suit. But we are implementing that in the first quarter. So I think it was last year that the postponement was not this year.

Okay. Got it. And Frank you mentioned that you probably laid off a quarter of your work force in the last few years. How much of that came last year, and what is the change that you expect in head count for the whole Company in 2010?

I think last year it was about 4,000. And we have not really talked about this year.

This year we hope we are in the right position going in.

Can you talk about the reductions in the sense of capacity per square foot or per yard, and have you taken down capacity as much as you have taken down work force? And where do you expect total capacity to be at the end of the year?

The capacity that we are utilizing is actually down more than the work force because we are not working the same hours that we have historically. So, beside the people coming down, you have lower hours that you have done, and looking over the whole business in different pieces, that one is hard to do because they're all over the place. There's so many parts and pieces. Just pulling a number out of the air, I would guess that this year we are probably going to run anywhere from 70% to 80%. As a general rule, we will have pieces that are significantly higher and pieces that are lower.

Got it, thank you.

Okay.

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

This is Jeff calling in for Sam. Thank you for taking my question. My question goes back to the cost savings also that you've recognized over the past couple of years, especially in SG&A. I know a lot of that has been permanent cost take out, but I imagine there's also a component there that is just discretionary, temporary lower discretionary costs. So my question is do you expect to see any of that come back in 2010?

I would guess that the discretionary pieces are limited to the total. As you come into different markets, the discretionary pieces are going to be if you think business is going to be significantly better, do you want to start aggressively introducing more products, putting more investments in with your customers, do you want to start increasing the sales force ahead of the curve to take advantage of it?

So those decisions will be made as the thing comes up. If you decide you want to wait for it to turn up and then bring them in as it goes up, or if you want to lead it a little bit so that you can have better performance in the marketplace, and we will have to make those decisions as they occur on a case by case basis.

Okay. So as a follow up, would it be correct then to say that, if we assume, just say we assume moderate sales growth in 2010, would you expect to see the normal early cyclical leverage in SG&A?

Yes.

That wouldn't be suppressed at all?

Yes.

Okay. Great. Thank you.

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

Yes, just a follow up on one of your comments, you had talked about some higher board prices for Unilin, I guess, A, is that in Europe, and B, is that a function of lower capacity on the continent, or just increased demand for the boards?

The board business has been struggling dramatically over the past years, as the capacities way out strip the markets. There have been shut downs of plants across the continent that has reduced capacity, there has been capacity taken off, and so the pricings in the board industry has been, as we said multiple times, has been close to cash costs across the pieces, as happens in these cyclical downturns.

What we are seeing now is it looks like that there is some inventory built back up, it looks like there is going to be some increased capacity utilization going into the first quarter across the industry, which is a good thing. What's happening is that the raw materials prices in wood are going up, so we're going to lose some of the upside due to the chasing the raw material lag in it, but there should be some better capacity utilization, and depending upon how the year turns out, we could start seeing the recovery of some of the margins in that industry.

And you have talked about European improving probably before the US and consumer, if I look at the Unilin segment, it is down 6% or 7% taking out currency, what was Europe in that mix, year over year?

I'll have to get back to you on that, Keith, if you want to call me separately. We don't have that here in front of us.

That's all for me. Thank you.

Your next question comes from the line of (inaudible) from Redmond Capital. Your line is now open.

(Inaudible - microphone inaccessible)

Hello? Operator, can you help us?

Mr. Redmond, your line is open.

Hi. This is (inaudible). I just wanted to talk about your cash flow. I know it was a tough year, and you generated a lot of cash as usual. Could you elaborate on what the cash flow implications were on the income statement, especially from the inventory side of things? Just talking about inventory liquidation, impact on the income statement and versuscash flow.

Your question is how much are inventories down, or how much did inventories impact our cash flow?

That's one, but I just want to understand how the inventory liquidation, how it impacts the income statement as well.

Well, inventories impacted cash flow positively, about $280 million for the year.

Okay. And could you talk about if it had any impact on income statement?

Well, to the extent that our volumes are down, that impacted the income statement.

And could you just elaborate on that, because it was a significant draw down, so that's why I want to understand how much impact it had on margins.

Why don't you give me a call back after this [Sabu] and I can walk you through that because it is going to take a while (multiple speakers).

Okay. Thank you.

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

Thank you, job well done. A couple of quick ones, could you comment on the carpet side or the Mohawk side, and there's things other than carpet in there, so I'm curious, did they perform roughly the same, down 8%? And then within carpet itself, I assume the Commercial was down somewhere in the 15% maybe 20% range, which would imply that the Residential was pretty close to flat, maybe down slightly year-over-year. I am just curious if that's the case, and if you expect Residential to maybe go positive in the first quarter?

We don't give out the specifics of each piece, but let's see if we can give you a flavor of it. You have the right direction. The Residential business is doing much better than the Commercial; the Commercial business is off substantially. Our surface pieces, like the wood business, that would have a high portion in new construction, would be off the most, following the construction business in it. Did I miss any other pieces?

So Jeff did your carpet actually do better than down 8%, in other words the Mohawk hard surface was off more than 8%.

On the industry number, which I assume you have, shows that the industry was at down 7% in units and about 14% in dollars. So I mean that's a reflection of what's going on in the world. We said we think we did a little better.

And then, Frank if sales were roughly flat in 2010, just as a starting point, what would working capital do?

It would probably be flat.

Okay. And then that $40 million, I think was a quarterly D&A number for Unilin, what will that number look like quarterly or annually for 2010, and how much of that is the acquisition amortization?

I believe it is going to be about the same in 2010 as it is in '09, both for D&A in total and amortization on a stand alone basis, John. Does that answer your question?

So it doesn't step down, materially?

Not yet, not yet.

Okay. Great, thank you much. Good luck.

Your next question comes from Eric Bosshard from Cleveland Research. Your line is now open.

This is Tom Mahoney calling in for Eric today. As you talk about Residential improving through the year, how do you think about new construction versus the remodel trends you are seeing?

I mean you start out that the new construction business almost came the a halt last year, so any improvement over that is going to show up in the piece, and have to understand that we are the last product to go in. So things that were started in January, we will see either mid year or third quarter at the soonest. So as that picks up, we will see some benefit of that one as we go through the year, from the low points.

The Residential side it was also at a very low point, and the expectation is that consumer confidence will improve, at all of these existing homes that are trading hands either to get them out of bankruptcy or wherever they went to, there's more remodeling going to those, and a combination of those things with an improved economy we expect to help us. We don't know the exact timing of it, but as we move through the year we are expecting it to improve because of that.

Got you. And then, you guys were talking about better positioning at the Home Centers and maybe some more partnerships there. Can you talk on the trends you have seen there, and maybe a read on what you see as underlying demand versus the promotions driving the business there?

The Home Center channel seems to have done better during the downturn than the Specialty Store channel, across most of the product categories. They tend to focus on more value products and promoting value as a general statement.

So as people's pocketbooks got stressed they appeared to do better. They have been aggressively advertising and marketing products to try to improve their position in the marketplace. We have been aggressive to try to participate and improve our position within the stores, and based on the commitments we have, we think that we will have a better business through the channel.

That makes sense, thank you.

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

Good morning, guys.

Good morning.

I just wanted to follow up on your comment about the laminate business coming out of the trough. And specifically, if you can comment on how you see licensing income, follow that, as laminate gets better.

The laminate industry has been going through the same declines as every other product in the industry. We think it is at the bottom. Depending upon which market and geography you're at, there are different pricing strategies going on by the different groups. With that I guess, our strategy has been to participate more in some of the lower price points and to extend our channels into some of the DIY channels that we have had our limited to minimal participation in, and we are putting through different strategies to take advantage of that.

As it goes back, and all categories are mix, and all product categories have declined, as we have participated in lower price product categories in all products to try to maximize our share of the business. So, as the industry has declined, we have tried to participate in some more of that than we would in all product categories.

From the licensing piece, much of our licensing revenues are based on the industry demands, so as the industry slows down, our licensing revenues also change related to those. We have had increasing success in licensing Chinese manufacturers, which years ago would have been unheard of. But we are getting better at influencing those things and we have had some Chinese licenses and we continue to go after more of them.

Okay. So as laminate gets better, would licensing keep pace, the percentage of licensing income keep pace with where you were historically, or how would that change?

It is not going go percent by percent, but as the industry goes up and down, we tend to go up and down, too.

Generally speaking, it is going to follow the volume of the industry, but the other thing you have got to remember too is when you have new customers you put in place, with license fees, you've got sometimes some initial up front fees that are paid, so that could kind of distort the numbers from year to year.

Okay. Well thank you very much.

Your next question cops from line of Arnold Brief from Goldsmith and Harris. Your line is now open.

Two quick questions. One, you took a lot of initiatives in 2009 to cut costs, and those efforts transpired as you went through the year. Although the event may have been completed, not all of cost savings were actually realized in '09. Could you give us some idea how much of the cost savings will flow through into 2010 from initiatives that we've taken in '09?

And the second question is, given what's happened globally, could you elaborate a little bit more on if and what you are doing to capitalize or to participate in the growth of Asia, which would balance the cyclical aspects a little bit more, given their growth?

Well let's start with the second one and we'll [see] the first one. In Asia, we basically have very limited participation as we speak. We have moved into eastern Europe with our laminate business. We are looking at putting a laminate manufacturing plant up in Russia. We have had conversations in both Russia and China with either acquisitions or green field, or other options that we are looking at, in various product categories.

We continue to look at those to decide how to participate in the marketplace, without creating unreasonable risks as we go through, and we will continue following those. It would not surprise me at some point if we had an acquisition or some other method of getting in in various product categories in those markets.

On the cost savings activities we incurred, as you probably know, a little bit over $60 million in cost related to restructuring in 2009. And we are estimating that we will see a pay back on those costs over about a year and a half or so. We have realized probably some portion of that this year, but we should see more of that next year, and that's really what we have disclosed so far.

Would you say that you're looking at Asia as a major strategic initiative at this point?

Yes.

Thank you.

Your next question comes from (inaudible) from [Seacor] Group. Your line is now open.

Thanks. Good morning guys. I was wondering if you could provide a little bit more color on the logistics and plans to address the 2011 and 2012 maturities. My understanding is the new ABL facility has early maturity triggers, if those 2011 and 2012 maturities are not addressed by certain dates. I know you guys are sitting on a chunk of cash now, but I assume as business improves you will need some of that that also for working cap. So any info you can provide on your thoughts there?

As I was trying to say earlier, I think with the 2011 maturity, the $500 million that's due at the end of this year, we have to have it set aside under the ABL requirements by the beginning of the fourth quarter. I think we will be able to pay off most of that with cash, we either have or are going to generate. And then we'll take whatever shortfall we have and roll it into the ABL. And then the 2012 maturity, I guess about two years from now, we're going to have to look at alternatives such as the bond market at some point, probably.

So for the 2011's then, you're basically expecting just to set aside the cash, basically lock box it?

For a lot of it, yes.

Okay. Great. Thank you.

You're welcome.

Your next question comes from the line of Akash Ghiya, Pine Cobble Capital. Your line is open.

Hey guys, thank you for taking my question. Just a couple of questions, if I can go back to the raw material side again. First, can you remind us if you [forward purchase] or hedging your costs?

No. That's an easy one.

Okay. So then I guess second, what is the typical delay between the soft price and the price you guys pay? The reason I am asking the question is if you take the Mohawk segment as a separate segment and look at it through your major raw material costs, the increases where the spot prices are today are massive. Specifically if you assume spot prices don't move throughout 2010, nylon prices are up, so they're at 35% plus, polypropylene 30%, polyester is 50%, when should we see that flow through, and how much of the delay is due to FIFO accounting?

A lot of our raw materials in carpet as we backward integrate it, go up and down with the marketplace and the lead times are relatively short. So with that you then have our inventory levels in between are roughly a quarter. So, they get postponed by about a quarter. And we have to keep evaluating and deciding when to raise prices.

Based on those prices, if you have been watching those things over the past two or three years as we do, you'll know that what those future things are six, nine months out at many times have no relationship to what happens when you get there in either direction. So we continue watching those things, and we will have to decide how to react to them as they to occur.

So our raw materials we'll buy them in the fourth quarter and they'll impact the P&L in the first quarter.

Okay. So I guess if I heard you correctly there is no benefit, you're seeing, in the fourth quarter, from I guess if you look at the increase in raw material between the third quarter and fourth quarter, the spot prices would suggest raw materials went up?

We're FICO inventory, right, you know that?

How much benefit did you guys see as a result of the accounting treatment?

None. (Inaudible - multiple speakers) We don't measure it that way. We buy it and then when we use it, that's when it runs through the P&L.

Okay. Thank you.

There are no further questions at this time. I will turn the call back to presenters for closing remarks.

We appreciate you joining us. We think we are positioned well for the future. And we will continue to reacting to what happens in the marketplace. Thank you for joining us.

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