莫霍克工業集團 (MHK) 2011 Q1 法說會逐字稿

Good morning. My name is Sara, and I will be your conference operator today. At this time, I would like to welcome everyone to the Mohawk Industries' first-quarter 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 period. (Operator Instructions). As a reminder, ladies and gentlemen, this conference is being recorded today, Friday, May 6, 2011.

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

Good morning. And thank you for joining our first-quarter 2011 conference call. With me on the call is Frank Boykin, our CFO, who will review the 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 Form 8-K and press release at the Investor Information section of our website for a reconciliation of any non-GAAP to GAAP amounts.

Thank you, Frank. Our first-quarter earnings per share were $0.34 as reported, or $0.42 excluding restructuring charges. Sales reported during the period were flat with last year. Unilin and Dal-Tile segment revenues grew as Mohawk's segments continued to be impacted by the challenging industry conditions. We grew our operating margins to 4.7%, excluding restructuring charges, an improvement of 40 basis points over first quarter last year, by driving cost reduction, manufacturing improvements, and efficiency gains throughout the enterprise.

Cash was $256 million at the end of the quarter. Our net debt to adjusted EBITDA ratio stands at 2.2 times, giving us flexibility to pursue strategic opportunities.

The consensus outlook for 2011 maintains recovery will strengthen and GDP will improve through the balance of the year. In the US, both remodeling and home sales are expected to improve over last year, and non-residential investment is estimated to increase over 8% in 2011. Continued reductions in the US unemployment rate are forecast through the end of the year. European sentiment remains above its historical average and the economy is expected to continue to grow.

Frank, would you give our financial report, please?

Thank you, Jeff. Good morning, everyone. Net sales for the quarter were $1.344 billion, flat with last year. Residential saw some weakness, which was offset by commercial growth in the US. Our European business growth trend continued in the quarter. The gross margin for the quarter as reported was 25.4%. However, excluding restructuring charges, it was 25.9% or 30 basis points better than the 25.6% margin last year. We were favorably impacted by price increases and cost savings, which were offset by higher raw materials and energy.

Our SG&A was $286 million or 21.3% of net sales. We held SG&A flat as we continue to control costs. We expect our full-year SG&A to improve as a percent of net sales by the end of the year. Restructuring charges were $7 million during the quarter. These were related to a commercial carpet plant in the Mohawk segment that we're relocating to other facilities. Of the $7 million, $6.5 million was included in cost of goods sold and half -- $500,000 was included in SG&A.

Operating income was $63 million excluding charges, or 4.7% of net sales. That compares favorably to 4.3% last year, showing an improvement of 40 basis points. We had favorable price and product mix, and productivity initiatives, which were partially offset by raw material increases.

Interest expense was down for the quarter at $27 million. It was affected by -- positively affected by the repayment of our 2011 senior notes and lower interest rates from our renegotiated bank facility that we renegotiated last year. We are estimating $27 million of interest expense each quarter through the rest of the year. Income taxes -- the income tax rate was 17% for the quarter, and we expect the rate to be in the high teens for the remainder of the year. Our earnings per share, excluding charges, were $0.42 per share, representing a 20% improvement over last year.

Moving to the segments, the Mohawk segment sales were $691 million, down 3.5% from last year. The decrease in overall sales were due primarily to softness in the residential business, offset partially by commercial improvement. During the quarter, we announced two price increases which will impact our second and third quarters. Operating income, excluding charges, was $24 million or 3.5%, comparing favorably to last year's 2.8%. We improved the margin with better productivity and cost savings, and higher raw materials, which were partially offset with pricing.

In the Dal-Tile segment, our sales were $344 million, up 1%, showing continued improvement. Residential improved throughout the quarter, with commercial continuing to grow. Our operating income was 5.1% or 60 basis points better than last year. This reflects the cost improvements and the efficiency gains that we experienced during the quarter.

Our Unilin segment sales were $326 million, representing growth of 7% over last year. This 7% increase was both on an as-reported and constant exchange rate basis. Operating income for the quarter was $26 million or 8% of net sales. It was down from last year due to higher raw material costs, which were partially offset by price increases. In the Corporate and Eliminations segment, we had a $5 million charge, and we're estimating a $5 million to $6 million charge each quarter through the remainder of the year.

Looking at the balance sheet -- our cash ended up at $256 million, with most of this cash in Europe. Receivables were $755 million, with our days sales outstanding improving to 45 days compared to 48 days last year. Our Accounts Receivable aging improved as the economy has improved.

Inventories were $1.075 billion, increasing from last year, primarily impacted by raw material inflation and foreign exchange. Fixed assets ended the quarter at $1.715 billion. Included in that were capital expenditures for the quarter of $53 million. We are estimating total capital expenditures for the year to be $280 million, and depreciation and amortization at $300 million. We ended the quarter with net debt at $1.374 billion and our net debt to EBITDA ratio of 2.2 times.

Jeff?

Thank you. The first quarter is seasonally the slowest period of the year. In the US, our revenues in both residential and commercial improved as the period progressed, due to bad weather affecting the beginning of the year. Our first-quarter gross margins improved by increasing productivity, improving quality, and better yields, offsetting the negative effects of material inflation and harsh weather conditions.

Our Mohawk segment sales declined 3.5%, with commercial showing improvement and the residential category still lagging. We expect continued improvement in the segment from new product introductions, additional customer commitments, higher pricing to cover material costs, and operational improvements. The residential order trends improved at the end of the first quarter and continued into April. The commercial business continued its recovery, with modular carpet tile products growing significantly. The hospitality channel is rebounding after several years of reduced capital spending.

We announced two carpet prices to offset dramatic material inflation, with the first in February and the second in April. The February increase should be fully implemented in the second quarter and both increases are progressing as expected. We're taking pricing actions as required to react to the volatile material costs.

About 30% of our extrusion project this year is presently operating, and we anticipate completion of the first phase by the end of the second quarter. This fiber manufacturing expansion will support the growth of our SmartStrand Triexta, and EverStrand polyester introductions, which have both won industry awards.

During the quarter, we launched a new Wear-Dated Revive brand, which created the industry's first premium polyester category as a value alternative to nylon. Our Wear-Dated Revive program is one of the most successful collections we have launched, and merchandising systems are presently being installed around the country.

In both the multi-family and commercial channels, we're introducing high-performance SmartStrand carpets with superior durability and stain resistance, which reduce the lifecycle costs of the products. We have secured additional commitments in the Home Center channel, featuring SmartStrand carpets with their premium attributes for luxury, performance, and reduced environmental impact.

We're implementing new customer relationship tools with our sales force, and hiring additional sales associates to maximize our participation in the expanding commercial category. Operational enhancements to optimize productivity, material, and service are being executed, and will improve our cost position this year. We're completing the closing of a carpet facility in South Georgia and relocating the production to other manufacturing plants. This transition will improve our service and costs, and has a payback of about one year. Our many GreenWork initiatives will continue to increase the recycled content utilized in our products and processes, furthering our sustainable manufacturing commitment while lowering our costs.

Dal-Tile sales grew 1% over last year. The sales trends improved during the period, with commercial outperforming residential. We continue the expansion of our Reveal Imaging technology, which creates more sophisticated surface visuals. New products using Reveal Imaging have been placed in the Home Center channel, and they will improve our share in the category.

Our new residential products have also received multiple industry awards. In commercial, we introduced new tile products with 65% recycled content, which are more environmentally sustainable. And we're offering new merchandising to simplify commercial product selection.

To recover higher freight costs, we've raised prices on our products and transportation. Cost reductions continue from new investments in technology, lean manufacturing, material innovations, and improvements in the supply chain. Distribution efficiencies are improving from new management systems, reduced fixed costs, and greater productivity.

We're implementing our ceramics strategy in Mexico to expand our local manufacturing and enhance our market share. The Mexican market is anticipated to grow about 5% going forward, and we're expanding our sales organization, product offering, and customer base to maximize our participation. Our new manufacturing facility is under construction outside Mexico City and should be operational by mid-2012.

Our Chinese joint venture is investing to gain market share, increase product mix, improve efficiencies, and strengthening the management systems. As expected this period, lower volumes and material inflation impacted profitability and will improve over the balance of the year. The Chinese government has taken steps to reduce housing inflation while concurrently committing to add 10 million new housing units. We're building a strong platform to participate in China and we will be positioned as a leader in the marketplace.

Our Unilin revenues were up 7%, both as-reported and on a constant exchange rate basis. Sales of most European products were positive, while US markets remain difficult but are showing improvement. Our margins were pressured during the quarter by escalating material costs, which are ahead of our price increases. Price increases were implemented in European flooring, roofing, and boards, to offset the material inflation. It appears that the prices of our major wood inputs have finally peaked in the period.

Our European laminate flooring delivered new product introductions earlier than prior years. Market acceptance of our innovation and styling have exceeded our expectations. We're continuing to expand sales in home centers across Europe, with Quick-Step products positioned as a premium offering. The products are specifically designed for this channel, and some home centers are creating special areas to focus on our products.

Our market share in the UK has increased significantly since establishing our own distribution. We've grown our line distribution in the Netherlands to drive our Quick-Step flooring products. In Russia, we're expanding our customer base in preparation for our new laminate manufacturing plant. The Russian facility is under construction with completion expected by the end of the third quarter.

Our European and Asia-Pacific wood business is growing by expanding geographic coverage, adding new customers, and improving product mix. Our Malaysian wood plants are increasing productivity and reducing costs. This year, we will consolidate our Malaysian plant and expand their capacity to support additional growth.

The US flooring business improved as we proceeded through the first quarter. We are strengthening our position with retailers in the home center and specialized hard surface channels. We have upgraded our Quick-Step independent distribution and won dealer awards for our new laminate and wood collections. We improved our US wood manufacturing costs, and enhanced the sales mix with higher value products and additional performance features. Additional small manufacturers have been licensed; our Uniclic technology, and we're beginning to see some industry volume improvements.

In our roofing and wood -- and board products, we're seeing an improvement in both sales and pricing. Margins are expanding with increased plant utilization, though our pricing still lags the material inflation we've incurred. In the period, we raised board prices 4% to 10%, and roofing is being increased 5% in the second period. Additional price increases have been announced for the second quarter in some products.

Our new insulation board sales are expanding further, as European governments subsidize the reduction of energy usage. In the third quarter, we'll be adding a third shift to the production line to meet increasing demand.

We have also extended our patented click technology into ready-to-assemble furniture. This new technology does not require screws or other devices for assembly. We've initiated test production to refine the technology and manufacturing processes. This product was debuted at the Milan furniture show on a limited basis and was well received. The technology has the potential to create a new product category in ready-to-assemble furniture, but it will take several years to evolve. A video of this product is available on the Unilin website at didit-furniture.com.

After the seasonally slow first quarter, we believe the industry recovery will continue through the balance of the year. Commercial renovation is improving, as companies begin to reinvest. We anticipate pent-up demand in the residential remodeling market, and improving home sales will positively impact our results this year. Price and volume increases, along with cost reductions, will enhance our profitability. With these factors, our second-quarter guidance for earnings is $0.87 to $0.97 per share, excluding any restructuring charges.

We are investing in many strategic opportunities, which our present investments can support about $250 million in additional sales and new markets. These include the Mexican ceramic market; the Russian laminate market; the European insulation board market; a new Clic ceramic tile, as well as Clic furniture. In addition, we have our Chinese joint venture, which can become one of the leaders of the Chinese ceramic market.

We have significantly redesigned our business to maximize our long-term results while managing through this challenging period. We have improved our organization's ability to drive innovation in product, processes, and costs. Our investments in new assets, geographic expansion and systems will enhance our core businesses and create new growth opportunities.

With that, we'll be glad to take questions.

(Operator Instructions). Dennis McGill, Zelman & Associates.

Was wondering if you could talk about volumes in the first quarter across the three businesses and how that compares to the revenue numbers?

Well, as you saw in the first quarter, we started out with multiple things happening. We started with the weather in January, which, you know, impacted the start of the quarter. We had multiple price increases across many of the different pieces. We also had in the piece to go through, there was de-mixing in different product categories, as customers tried to switch from the higher cost products to some of the lower cost products. We had the biggest impact of this in the Mohawk segment, where you're seeing polyester impact the higher cost nylon products.

With all this, we see the second quarter sales -- we expect to be up; we expect to be up both in dollars and units. And all this is included in our estimates as we're guessing at it for the second quarter.

I was just asking specifically about the first quarter. I don't know if you have the numbers in front of you, but for example, in the Mohawk business, I think revenue was down -- how much were volumes up or down? And the same question for the other two segments.

If you look at our total business, Dennis, the volumes were down probably about 2% for the whole quarter. But Jeff's point was that it trended differently from the beginning of the quarter to the end. The Mohawk segment was down the most and actually the other two segments were up in volume.

Okay. Got it. And then when you think about the trend through the quarter and into April being positive, can you separate out how much of that is market versus potentially some pull-forward of demand from the price increase announcements?

I don't think that we could actually tell -- there's a lot of the price increases were in the first quarter, but there is some lagging over into the second, so I can't give you a good estimate. But we think that we're going to be positive going forward for the year.

Okay. And then just quickly, Frank, could you give us some guidance on how the working capital will look as we get through the year? It looks like you might've pulled some forward into first quarter, but just any thoughts around where that trend is for the year.

To start out with -- let me start and he can give a little more detail. The inventories in the first quarter were up about $70 million. We think about 70% of that came from inflation and FX. On purpose, we increased some of our inventories with the higher raw material costs. And as we go through the second quarter, we expect the inventories to turn and get back more in line with where we'd like them to be.

And then I think, Dennis, by the time we get through the year to the end of the year, we'll see an improvement overall in working capital, as it will continue to trend down and will improve the position.

So for the full year, working capital is flattish, or --?

No, it should be down from where it was at the end of 2010.

Got it. Okay. Thanks a lot.

Michael Rehaut, JPMorgan.

First question on trying to look at margins a little bit, particularly the Mohawk segment. You're up a bit year-over-year 1Q '11 over 1Q '10. Given the timing of the price increases as well as the raw materials, I mean, is that a trend that you expect to continue? And as you look at it in a bigger picture, you hit a 7% margin in the fourth quarter. I mean, is that something that you hope to attain as we get into the back half of the year?

I think when we look at our margins year-over-year, Dennis -- or, I'm sorry, Mike, we're expecting the margins to improve from 2010 to 2011.

Okay. And that 7% that you hit in the fourth quarter, is that something that you think is attainable as you get into the back half of the year?

No, I'm not speaking to individual quarters, I'm just speaking to the full year -- seeing an improvement year-over-year for the full year.

Okay. And second question just on -- I believe you said in the beginning -- and I might have caught this incorrectly, but you'll correct me -- is that you had mentioned acquisitions. And certainly, there's a lot of investments and partnerships in China, and the investments in Mexico and Russia. But historically, over the last 10 years you've also made some decent strategic acquisitions.

Can you give us an update in terms of how you're thinking about that? And with the net debt to cap pretty reasonable at this point, kind of a target or pipeline in terms of how you're thinking about things, and what small, medium, large, however, to think about what you might do in that area over the next year or two.

Yes, we're always looking at additional acquisitions. We think we're well-positioned to consider other ones. As we look forward, we think there are a number of potential acquisitions in North America that would fit our direction and position. In addition, we continue to look at high-growth areas around the world. We have bases already in several countries to either expand the product categories we're in or add to them. And we're also looking at other high-growth markets. So I would expect that over the next couple of years, you will see us active.

In North America specifically, given you have such large positions in most flooring categories, could you give us an idea within the different categories what you're thinking about?

I mean, that would just -- it's just we're represented in all the categories; it would just be tie-on acquisitions within the various pieces.

Okay. Great. Thank you.

Kathryn Thompson, Thompson Research.

This is Jamie Baskin on the line for Kathryn. With the margin improvement in the Mohawk segment, can you break out how much was related to reducing cost structure, production efficiencies or price increases?

You know, probably the best way to handle that, Jamie, is if you and I talk offline after the call. I don't have that number here in front of me.

Okay. And then can you provide the growth rate you're seeing as far as nonresidential repair and remodel trends during the quarter?

It's kind of single-digit range.

Okay. And is that the same for that -- the modular tile you were speaking of?

The modular tile is growing dramatically. As we -- last year, we went into the year and we had to make some changes in both our -- in our Mohawk business. We put in more products in polyester to react to the market changes, but we didn't anticipate it to move as fast as it did. But because of the increasing material costs, it moved faster than we anticipated. So we made moves coming into the second half with it.

We also made other moves in our commercial carpet tile business to increase it. The commercial carpet tile business is growing in the teens at this point, but we're seeing some shrinkage in our broadloom business.

Okay. Thank you. That's all I had.

David Goldberg, UBS.

Good morning, it's actually [Susan] on for David. Can you talk a little bit about -- you mentioned the fact that despite the price increases you've implemented, you still are basically behind relative to where raw material prices are. Given that, and the fact that you are confident that things can improve through the year, do you think you can still see that improvement if you need to implement, or if you decide to implement further price increases as we go through?

Historically, our margins get squeezed as we do price increases, because we get hit with the cost increases before we can get the increases fully implemented. So historically, we lose some margin for a period of time.

On the other hand, the industry has shown it can pass them through. When our margins get impacted by the raw material costs, we have to pass them through. And we've done so in the past.

Okay. And then just kind of building on that a little, how do you think about the trade-off between consumers moving down to lower margin kind of products, relative to maybe not being as aggressive with the price increases and trying to shift the product mix a little bit?

We always try to find more ways to add more value and sell higher-value products. In a rising market, you almost have -- our products are driven by a retailer assisting a consumer and purchasing a product. And it tends to be the retailers are afraid of the value they create, and they tend to push the consumers down, thinking that holding price is a value-added proposition for them. So you have this compression that goes on through the whole stream.

In the carpet side of the business, you have a phenomenon going on that as the raw materials for nylon increase, that the consumers are being sold lower-cost products. But they also have a different value proposition. So that whole trend is offset in some of the topline growth that would normally show up with the revenue increases.

Okay. Thank you.

Dan Oppenheim, Credit Suisse.

I was wondering if you can talk a little bit about the comments you made in terms of the increase in the presence in the home centers. How do you look at that in thinking about margins you would achieve on that? Would you think there's enough volume from that, that it should help you to leverage the overhead? How are you thinking about the sales in the home centers?

I mean, our goal is to fully participate in all the various marketplaces. The home center channel has a significant portion of each of the different categories. We need to participate in all those markets and we're doing everything we can. In each of the segments, we try to bring added value as well as supplies based on price and service. And we think that we have resources to do that. I think that it's going to help our business long-term and we like all the business we can get.

Okay. And then in terms of the margins in the Mohawk business, with what we saw in the first quarter, I imagine much of that wasn't coming from price, given the timing and the -- how long it takes them to come through. Was there anything -- [everything] about the price in helping the second quarter, is that (inaudible) a full net positive? Is there anything -- any offset that we should be thinking about in the second quarter?

We have the offset from the second price increase, which won't be fully implemented but the costs are fully being taken. So that one won't be fully implemented through the piece, which should benefit the third quarter a little bit.

Okay. Thanks.

Bob Wetenhall, RBC.

Could you just touch on your view if you're gaining any market share in the Mohawk segment domestically?

I think that the actions we took last fall that we did not aggressively move into the polyester business as fast as we should. We didn't see it changing as fast because we didn't anticipate the changes in the product costs as much as they were. So I think what's happened is we've come into the first quarter, if we compare the first quarter to the fourth quarter, we're improving our position within the marketplace. I think that the different steps we've took, we're getting benefit from them going forward.

Is that in both polyester and nylon?

I think we're just addressing the total market.

The total business. (multiple speakers) We also have another category which we have unique to ourselves, which is what we call our SmartStrand products. And they're made out of a fiber which we are the only person -- the only company selling it presently in anything. And we're actually creating a unique product category with unique advantages. And it continues to grow also. So we have three methods of participating.

On that too as well, and this is my follow-up, if you still experience raw material inflation and you're able -- not able to fully offset it through price increases, are there other levers you can pull on the cost-saving side to support margins in the Mohawk segment?

There are, but it's part of our fundamental structure of doing it. We're continuing to invest in capital investments as well as process changes to improve our cost structures as we go through. We're continuing to redesign the business and to take costs out in each of the businesses. Every business starts out the year with goals of cost takeouts across the business to improve productivity and cost structures. And I mean, they drive those throughout the entire year in all businesses.

But Bob, our expectation is if raw materials go up, we're going to pass those price increases through.

That's really helpful. Thanks a lot.

Stephen East, Ticonderoga Securities.

If we could look at the raw materials and the trends, if you looked at year-over-year, the total basket for your Company, how much would you say raw materials are up? And then oil has started to come down. How quickly -- if raw materials or if oil-derived [raw materials] start backing off, how quickly would we see that running through your income statement?

I don't have the total number in front of me. I mean, the impact is huge. Hundreds of millions of dollars, that's been the cost of the different pieces. So we'd have to change the business and the products, and pass the increases through to get these things through across all the different segments and categories. The prices, in most cases, we will feel the ups and downs, because we basically are buying at market prices or contract prices, so we feel the increases almost immediately from the time they go through.

From the oil piece, they do go up and down based on oil, but there's another phenomenon that's involved, which is, as we went through the recession, the worldwide market for chemicals -- nobody put the investments in. So as you have the world marketplace growing, that many of the chemicals produced in the US are being shipped overseas. The impact of the exchange rates of the weaker dollar are making it a higher value to ship overseas. So not only do you have on one side, the oil prices affecting it, you have the high demand for limited resources. And they don't all -- one plus one won't equal two.

Okay. All right. I appreciate that. And then the second part of my question is two different issues. One, could you talk about what you expect the foreign exchange impact on Unilin in the second quarter? Because fourth quarter, it cost you nearly 14% of sales; first quarter didn't cost you any.

And then the second part of that and the second question -- the Mohawk division, is the fourth quarter result more what we should expect moving forward? Or is the one quarter result more reflective of what's going on in that unit?

Yes, we'll probably have to get you to repeat a little bit of that, but on the FX question there, Stephen, I think the way to think about it, you can come up with your own estimate, but as the exchange rate moves a nickel, you could say that that equates to about $1 million or so of operating income, up or down.

And then what was your second?

And then the second part, your revenues were up a little bit in 1Q in the Mohawk segment but your op margin was much lower than the fourth quarter. Is the fourth quarter more reflective of what we should expect moving forward? Or is the first quarter's operational results more reflective of what we should expect?

I think you have to look at it, again, on a full-year basis. And our expectation is for the full year, that the Mohawk margins are going to be up this year versus where they were in 2010. Traditionally, historically, the margins have always been lower in the first quarter and generally have been higher in the fourth quarter, just because of timing of certain expenses.

Okay. That's helpful. Thanks.

David MacGregor, Longbow Research.

Just with respect to the guidance, I guess at this point, you have a pretty good sense of what you're going to achieve in the way of price increases. You're a FIFO cost company, and based on your inventory turns, you have pretty much 100% certainty around your raw material costs, given that we're already one-third of the way through the quarter. So I guess the -- what remains uncertain is, over and above just your ability to continue cutting manufacturing costs, which I guess is somewhat linear, what are the volume and mix assumptions that you've got in your guidance?

We don't give out specific pieces for each category of product. We blend those together. The assumptions are that the volume is going to improve as well as the pricing. There will be some mix deterioration going on through the piece as we downgrade the cost product again from the nylon to the PET mix as we change. And we blend all that together.

We would give you all the details, but I can tell you when we get through, none of our assumptions come out right. (laughter) The only thing that happens is we hope to get the average of all the misses about in the middle.

Do you expect much of a disparity in terms of your volume outlook for the second quarter across your three segments? Or is it going to be relatively close?

There will be some fluctuation there, David.

Okay. I wonder just secondly, if we could talk a little bit about the commercial business. And specifically, if you could just talk about your strategy for reestablishing strength in carpet tile. You seem to be positioned at lower price points right now, lower face weights. When do you begin to make a more pronounced push-up market to higher price points?

I'm not sure your assumptions are exactly right. We participate in all the different price points today. We're not a lot different than the average of the industry. I guess we tend to talk about the lower ones because we had the higher ones established prior to now.

Our missteps from a year or so ago did impact our strategy. We're building back the confidence in the products. We have taken care of all the problems that occurred. And we think we're well-positioned -- again, we're growing in the teens already -- like in the high teens, we're growing already. What's happening to us is that the broadloom business, as the marketplace is moving [up], we're not -- we're offsetting some of the growth we have with loss of broadloom business, which is typical of the industry.

What ends up being the end market mix for your carpet tile right now? I realize hospitality is pretty important. Can you just talk about some of the other end markets where you feel you're strong or you have an advantage?

We really participate in our commercial business across every category that's out there. I would guess in the hospitality business, we have some unique things because of our Durkan print businesses. We have some unique positions within it. But all the rest of the markets we are participating in and have significant shares in all of them.

How do you stand in education, I guess, since we're heading into a seasonally strong period in that end market.

I would say that we're one of the best positioned companies in the country.

Okay. Terrific. Well, thanks very much, guys.

Laura Champine, Cowen and Company.

Could you talk about your share, your market share trends outside of the Mohawk segment? So in Dal-Tile and in Unilin, do you feel like you're still gaining share?

And also, could you discuss the -- I know those segments are more fragmented from a competitive standpoint. Can you talk about how that helps or challenges your ability to raise prices?

All the different markets are all unique. I think that the ceramic business has been compressed significantly over time. I think what happens is you have different times of adjustments during different parts of years and timing, so that in the ceramic side of the business that, since a lot of it is imported, you have major swings in inventory. And it can affect years significantly as the imports go up and down, changing those inventory levels.

We believe that we continue to have -- maintain and grow our market share within it. We continue to aggressively participate in all the different aspects of it. We continue to innovate in products. We keep talking about Reveal Imaging, which is a printing technology, which we're leading the country in in the business here, which is allowing us to get better looks in the marketplace, and improve our positions within the marketplace.

When you talk about the laminate business, our strategy is to participate in the entire market with limited participation in the opening price point, which is the lowest value-add in the market. And since we've spent so much effort in creating differentiated looks, the players that do that are the ones that have limited technology and differentiation.

So as you look into that business we can participate, it depends on the share growth of the different qualities of merchandise in the laminate business [is in]. I think we're well positioned where we are. We don't want to be the commodity producer in the marketplace, because we bring much more to the marketplace than price.

And does that positioning and does your product innovation make it easier for you to push price increases through? Or how do your -- are your competitors going along with these increases? Because I'm sure they have the same cost pressures.

Because of the position in the marketplace, it's not as volatile, up or down. So as it compresses, ours doesn't go down as much. On the other hand, when it starts moving back up, ours probably doesn't move up as much because we didn't move it down as much to begin with.

Got it. Thank you.

Keith Hughes, SunTrust.

A couple of questions. Number one on the guidance. The residential trends you've been discussing in the call, are you assuming they stay -- the trends in April -- are you assuming they stay the same for the rest of the quarter? Improve? Decelerate? What's kind of the view there?

We're assuming that the trends stay about constant through the period.

Okay. And specifically within Unilin, you talked about some pricing earlier. Will your pricing actions be fully implemented in Unilin by the end of the second quarter? Or is that going to drag over into the third?

The ones that were initiated in the second quarter -- in the first quarter will be fully implemented. We have increases being put in in the second quarter, and they're dependent upon the timing of when they go in.

But is the majority of the pricing work has been already done in the first?

The majority of it has been done, but there's more coming in the second.

Okay. Is that going to be on the core Unilin or is that just that ceiling stuff you were talking about earlier?

The European laminate was increased in the first quarter. There's roofing going up in the second quarter and some other board prices going up.

Okay. Final question -- Frank, you had referred earlier to working capital being down for the year. And I know you basically think sales are going to be up for the rest of the year. What's going on in there? Usually -- normally, working capital would rise with sales.

Well, we -- the plan is -- and this -- it all depends on what happens with raw material inflation, but the plan is basically to improve our terms.

So inventory would be the delta factor there?

Right.

Okay. So as you look at inventory and production rates, are you moving up production in the second quarter or keeping it similar to what you saw in the prior year? How does that view play out?

You want Q2 production versus Q2 last year?

Yes.

Is that your question? I'm not sure I've got that in front of me here. I don't know if you (multiple speakers) --.

Obviously, it's ramping up since the first quarter just seasonally.

Correct. We don't have the estimates for the last year (multiple speakers) production volumes.

Well, let me ask you this way. With the inventory, we would just see the normal swing-down just at a greater rate in the second half of the year?

When we talked about it, remember that a major part of the increase, 70% of the increase, came from raw material inflation or FX changes. So you're only talking about $15 million, $20 million across our whole business.

Okay. All right. Thank you.

Sam Darkatsh, Raymond James.

If you could, I know we've been dancing around this a little bit, the Mohawk segment -- what was residential down and what was commercial up, generally speaking?

We don't give out specific (multiple speakers) --

Not intentionally.

Generally speaking, if you could qualify -- would they be low-single, mid-single digit kind of stuff?

We don't go down that route.

Okay. So, then I'll rephrase then. So versus the industry, are you maintaining share in either residential or commercial? Or is the effect that the industry statistics and your own differ, is that a function -- more a function of your mix versus the industry? If you could help throw some color on that.

Yes, I think that last year, as we kept saying, we lost some share in the first three quarters or so of the year. And I think if you look at it on a sequential basis, we're doing as well as the industry, which would be as you move from fourth quarter to first quarter.

So we've held our position.

So then do you anticipate then gaining share going forward because of the recent trends? Or when would we start seeing that on a year-on-year basis?

Your question is, are we going to gain share as we go throughout the rest of the year?

Yes.

That would be the plan, to improve our position.

So then at what point then --?

You have to go break down each of the comps from each of the quarters when the changes occur.

From a sequential standpoint, as far as you're seeing it, you began gaining share really in the fourth quarter?

In the fourth and first quarter.

Okay. And then last question and I'll defer -- the incremental margins in Dal-Tile and Unilin, there's a lot of moving parts, obviously, with the pricing and raw materials and volumes and such. But give us a sense of how we should look at that, generally speaking.

I don't have that in front of me right now, Sam. So rather than just venturing a guess, if you could call me back afterwards, I can give those to you.

Excellent. Thank you much.

John Baugh, Stifel Nicolaus.

I may have misheard it, but mix in the Mohawk division -- was that a help or a hurt in the first quarter?

First, it's hard to pull out mix and price and separate them. But basically, I think what we've been saying is mix has been going down as prices have been going up.

So, when we talk about mix, I understand that a polyester product is less expensive than a nylon. So on a price basis, that would be a mix [down]. I'm wondering, though, in terms of gross margin percentage if there is a reduction when we use a polyester versus a nylon. And I guess, most importantly, whether in gross profit dollars, if there is no slippage but there's still slippage in gross profit dollars, because the gross sale dollar is lower?

I think the mix question is more related to price points and commoditization of the product. And it doesn't matter which raw material base you're using -- the more commoditized it is, the lower the margin; and the more differentiated it is, the higher the margin. So if you stay in similar things, they stay similar; if you move between them, they change.

Are you seeing, Jeff, any improvement -- I know Triexta is doing well and that's a high-priced polyester. Are you seeing any improvement in the -- within any of the line upwards? Or is there still sequential or year-over-year pressure?

First is, it's not polyester. (laughter) It's a different material according to the government.

Second is that we started out with Triexta positioned as the premium product in the marketplace, with differentiated features and values. So on average, we've had a higher mix in it, due to the market positioning and product positioning.

What we've said now is we're introducing it in some new categories to compete with the other products. So we're putting it in the multi-family product category as we speak; we're getting ready to put some in the commercial product categories. And these things will put it in lower price points and will lower the margins, more in line with more commoditized products. (multiple speakers) [So it's backwards.]

Right. So then my last question was a mix question related to Unilin within laminate in Europe. You mentioned the European markets are strengthening. Is there any trend in mix in laminate Europe? Thank you.

The mix in laminate Europe I guess will be the mixes there have declined. And what's happened is there's so much pressure on the commodity pieces, it has pulled down some of the premium pieces as well, from a pricing standpoint.

Thank you.

Kalpesh Patel, Jefferies & Company.

Just a question on your Mexican plant there, that's now your second plant. Is that primarily going to be just for the domestic Mexican market and the US market? Or do you see yourself also selling further south into perhaps Brazil and Latin America?

The primary use is for the Mexican marketplace. The location is set in order to be where the majority of the people are near Mexico City, to reduce freight costs.

In the interim period, we'll take some of the capacity that we have in the north and shift it to the southern plant, which will open up some capacity for the North American marketplace. But the goal will be not to ship it out of that plant due to its geographic location, if possible.

Okay. No, I'm just trying to follow-up on a previous question that you were asked about other markets globally. And so now that you have presence in Russia and China, are you also considering having assets on the ground in markets such as Brazil and India?

Yes, we would consider those.

(laughter) Have you done more than consider? Like, some research, put some money into it? Or just still considering it?

(multiple speakers) Well, we can't give you a list.

(multiple speakers) I can tell you over a period of years we've talked to a lot of people in marketplaces and we continue to talk to them.

(laughter) Okay. And then in terms of my follow-up question -- in terms of the raw material inflation in the European business in Unilin, I think in your opening comments, you said that the wood pressures have peaked. And so if you could just talk about actual percentages. I know we've been talking a lot about price increases and commodity price inflation, but the actual percentage increases for the inflation and your prices to offset it, that would help. Thank you.

I'm not sure -- I don't have those with us. Just as some comments -- as in the United States, where we've taken corn and used it for energy, and we have changed the supply and demand nature for corn in this country, in Europe, the government has been subsidizing the burning of wood. So what you have is the energy use, which is subsidized, competing with the non-energy uses, such as boards and material. And those things combined have been driving the material prices up in an environment where they should be going down, because of the supply and demand of wood products in the marketplace.

With that, there's also that, as we went through the recession, wood is taken out of the forests and the infrastructure, taking out of the forest declined. So all these things created significant pressure as the economy started improving.

As we said in some of the comments, I believe, is that between last year and this year, some of our board product, we've increased 25% to 30% over the past 12 months, which is a reflection of those increases. And the numbers are so large, you can imagine, they're impacting our costs -- over [what] period of time?

You've increased your prices of 25% to 30%?

In the board businesses.

Got you.

[That's it.]

Okay, but (multiple speakers) --

I don't actually have -- if you want to call Frank back, he'll get you a more specific on exact wood prices in the marketplace, but it's dramatic.

Okay. But they've peaked at this point, is your outlook?

I can't guarantee it, but they appear to have peaked.

Okay. Okay, thank you.

[Alex Cook], Voyant Advisors.

I was wondering if you could talk a little bit about your historical levels on inventory. You guys had mentioned this this quarter and last quarter, that you guys wanted to bring the inventory levels down to that level. So I was wondering if you could tell me what those levels were.

A year ago well, at the end of December 2010 -- is that what you're asking for, the end of 2010, December?

No, I guess more just in general, you guys had mentioned that you guys wanted to bring the inventory levels down and then inventory increased. I know that you guys had a lot of cost inflation, but you guys also had some volume increases. So I wanted to know (multiple speakers) --.

I mean, I think what it is, is in each of the individual businesses, our goal is to increase our turns and reduce our working capital by improving our processes and procedures everywhere, and planning strategies. And in doing so, as you manage it, can you give the same or higher levels of service with better utilization of the inventories.

Now offsetting that is balancing the plants out in given individual periods, offsetting it again with rising raw materials, where you tend to increase prices, increase inventories as raw materials are assumed to increase in the future, and balancing all that as we go through. Our goal is every year to improve our inventory turns and our use of working capital from the prior year on average throughout the year.

Okay. Perfect. Thanks, guys.

And your last question comes from the line of Joshua Pollard from Goldman Sachs. Your line is open.

This is [Antuon] for Josh. Could you talk to how much of the volume lost due to bad weather you factor that as pent-up demand for the remainder of the year?

I think it's flowed through already.

Okay. And the second thing was on the tax rate, what is driving the lower tax rate? And also the interest expenses as well were slightly light in the quarter. Can you talk to that as well, please?

Yes. The tax rate is driven by distribution of earnings between the US and other countries. We have tax strategies in place outside of the US that give us a lower overall effective rate. So as the income distribution changes back and forth, we see our tax rate impacted by that.

And then on the interest improvement year-over-year, that's being driven by reduction in principle, where we paid down the 2011 bonds that we had a year ago. And then also, as I mentioned earlier, we renegotiated the rates on our bank facility, I think six or eight months ago. And that's also favorably impacted our interest.

Got it. Thank you.

And with no further questions in queue, I turn the call back over to the presenters for any closing remarks.

We appreciate you joining us. It looks like that we have tapped the bottom of this. We are anticipating improving over the next year or two. We think we have a lot of strategic opportunities as well as maximizing our existing core businesses. And we're working hard to create the most value for our shareholders that we can. Have a good day.

And this concludes today's conference call. You may now disconnect.