莫霍克工業集團 (MHK) 2012 Q1 法說會逐字稿

Good morning, my name is Heather, and I will be your conference operator today. At this time I would like to welcome everyone to the Mohawk Industries' first-quarter 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 call is being recorded today, Friday, May 4, 2012. Thank you, I would now like to introduce Mr. Jeff Lorberbaum, Chairman and CEO. You may begin, sir.

Thank you. Good morning, and thank you for joining our first-quarter 2012 conference call. Joining me on the call is Frank Boykin, our CFO, who will review our Safe Harbor statement and later our 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 is 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 a 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.

Our first-quarter earnings per share were $0.58 as reported, an increase of 38% over 2011 adjusted results due to volume increases, price increases, cost reductions and lower interest expense. Our sales grew about 5% as reported or 6% on a local basis, with year-over-year sales growth for the past four quarters.

Price increases in the first quarter will offset the material inflation in our current cost in the second period. SG&A improved by 90 basis points as a percent of net sales.

During the first quarter we generated operating income of $72 million, an increase of 14% over 2011. We paid our 2012 bond obligations using our short-term facility at lower interest rates. Standard & Poor's upgraded our credit rating, and Moody's elevated our outlook to positive, reducing our interest rates on our bonds.

Our balance sheet remains strong with our net debt to adjusted EBITDA at historically low levels of 2.2 times. We have almost $500 million available for strategic opportunities.

In the US our residential categories reflected generally positive trends in the housing market. The National Association of Homebuilders Index is at one of its highest levels since June 2007, with a positive outlook from record low interest rates and increased approvals. The mild winter weather contributed to the strongest existing home sales for the period in five years, which should support greater remodeling and renovation in this year.

Our commercial outlook is for moderate sales growth in-line with the AIA Building Index for commercial construction. Frank, would you give our financial report please?

Sure, I would be glad to, Jeff. Good morning everyone. Net sales for the quarter were $1.409 billion, up 5% or a 6% increase on a constant exchange rate basis. Both higher volume and pricing benefited our results. Gross profit was $359 million with a margin of 25.5%, flat with last year.

Price increases, volume and productivity improvements offset inflation. SG&A was $287 million or 20.4% of net sales. This was an improvement of 90 basis points over last year. We are continuing to control our costs, holding our dollars flat and leveraging on higher sales. We expect SG&A dollars to be flat for the full year.

Our operating income was $72 million with a margin of 5.1%. Our margin grew 40 basis points over last year. We continue to drive profitability improvements throughout the business.

Interest expense was $22 million. It was lower than last year with lower rates from our new bank facility and a rating agency upgrade. We estimate our quarterly expense to be $20 million in future quarters.

Our income tax rate was 20%, which compares to a 17% rate last year. We expect the rate to improve slightly over the rest of the year. Earnings per share were $0.58 per share or a 38% improvement over 2011.

If we move to the segments, the Mohawk segment sales were $700 million or 1% better than last year, as we implemented carpet prices increases to offset inflation. Our carpet sales are up, in-line with the carpet industry which increased 3% year-over-year.

This was offset by lower rug sales. In the rug business, deferred customer promotions, channel inventory declines and mix reduced our rug sales.

Our operating income was $25 million with a margin of 3.6%, which was flat with last year. Raw material inflation partially offset -- was partially offset by lagging price increases.

In the Dal-Tile segment sales were $393 million or up 14% over last year. We had a strong quarter this year with improvements across all of our channels. Operating income came in at $26 million with a margin of 6.6%, up 150 basis points over last year. Volume and productivity improvements drove higher margins.

In the Unilin segment sales were $337 million, up 4% as reported or 7% on a constant exchange rate basis. Both the US and Europe gained over last year. In Europe we offset the slowing economy with new products in new -- and the regions. Operating income was $27 million with a margin of 8%, which was flat with last year. We were impacted by both mix and startup costs in this segment.

In our Corporate and Elimination segment the operating income was a loss of $7 million. It was a bit higher in the first quarter this year due to timing; however, we expect our annual expense to be in-line with last year.

Turning to the balance sheet. Receivables came in at $782 million with DSOs at 47 days. We are in-line with last year. Inventories at $1.165 billion are up in dollars with continued raw material inflation and increases due to sales volume. Inflation accounted for $50 million of the increase, with acquisitions and pre-buys ahead of inflation accounting for about $25 million.

We expect improvements in inventory as we move through the year. Fixed assets ended the quarter at $1.718 billion. Capital expenditures during the quarter were $43 million, with depreciation and amortization of $73 million. We continue to estimate $235 million of capital expenditures for the full year and depreciation and amortization at $300 million for the full year.

Our long-term debt ended up at $1.7 billion. Operations this year used less cash than last year. Cash from operations improved almost $25 million over last year.

In April of this year we paid off bonds of about $340 million and rolled that into our bank facility. Additionally, Standard & Poor's upgraded us to investment grade and Moody's improved our outlook to positive. All this has reduced our interest expense.

Finally, we purchased a minority interest in our Oklahoma tile plant joint venture, eliminating our noncontrolling interest. Also, we will be eliminating -- this will eliminate the minority interest charge that we have been reporting in past periods. Jeff.

Thank you, Frank. The Mohawk segment sales grew 1% as we executed price increases that should cover material costs in the second period. Higher carpet sales were in-line with the 3% industry growth, offset by lower rug sales from deferred customer promotions, inventory reductions in the rug channel and lower rug product mix.

Operating income increased 6% over 2011, even with compassion from raw material increases. Throughout this segment we continued to reduce manufacturing costs with improved efficiencies, enhanced productivity and realigned assets.

We anticipate improved margins from the price increases and growth of our popular SmartStrand and EverStrand lines. For the third consecutive year Mohawk's SmartStrand carpet won the industry's Dealer Choice Award for new carpet introductions.

We launched our revolutionary SmartStrand Silk collection in the period and sales of its premium fabrics will benefit the second quarter. SmartStrand Silk represents the next generation of soft carpet with the inherent performance, ease of care and unique environmental features that have made SmartStrand successful. SmartStrand Silk has embraced by the retail community, and its initial sales trends are tracking very positively. In the second quarter we are expanding our silk offering further with additional styles and price points which enhance our product mix further.

Our EverStrand and Wear-Dated Revive polyester sales continue their expansion due to the value proposition they offer, fashion appeal, and the differentiated green position with industry-leading recycled content.

Our relationships with specialty retailers continues to broaden as our products satisfy the changing consumer preferences, supported by marketing, merchandising and training, which improves their results.

For Mohawk branded hard surfaces we introduced solid wood with Soft Scrape surfaces, ceramic with Reveal Imaging, laminate in exotic species, and luxury vinyl tile planks.

We announced a price increase of 3% to 5% on our vinyl and other selected hard surface products. Our Mohawk hard surface products are gaining position in the builder channel which is beginning to show improvements.

The commercial category, our hospitality and core business improved, offset by some the weaknesses in our premium products as customers traded down. To offer greater value we introduced new high-end Duracolor products with improved styling and performance at lower price points. We have also extended our SmartStrand plan with differentiated features into our commercial business.

In hospitality we introduced new technology that provides improved definition and design capabilities. In the period commercial price increases have been implemented to cover higher raw material costs.

Our 2011 investments continued -- contributed to productivity gains across the business. Our increased fiber capacity is supporting our growing SmartStrand and EverStrand products. Other investments have enhanced our production costs and material yields.

Our carpet tile expansion, product reengineering, process simplification and reduced complexity improved our productivity, yields and service levels. As part of our ongoing commitment to sustainable manufacturing, we increased the utilization of recycled materials, reduced our waste and lowered our energy consumption, all of which is good for our business, our customers and the environment.

Additionally, we are improving sales force effectiveness through implementation of CRM tools to identify customer and product opportunities in the marketplace.

Dal-Tile posted sales growth of 14% during the quarter, with double-digit increases in both residential and commercial sales. The segment grew primarily through increased residential remodeling and commercial renovation, successful product launches, and significant growth in the Mexican market.

Higher production volumes during the quarter created better cost absorption and margins. Selected price increases of 3% to 5%, along with energy surcharges, are being implemented to cover raw material and freight cost increases.

Residential ceramic sales continued their improvement which began a year ago, with growth in both renovation and new construction. Consumers' discretionary spending remains constrained, and consumers continue to trade down to lower-value products.

We have expanded our specialty store position by improving distribution with our new products and enhanced merchandising. Sales grew in all channels driven by expanded wall and floor tile placements, new tiles with Reveal Imaging, larger sizes, realistic wood designs, and a new premium commercial collection.

Commercial sales continued strong with remodeling in retail, restaurants and hospitality showing the most progress. For our Dal-Tile brand commercial sales representatives are being added to target large projects and expand our specifications. Additional large-size tiles are being introduced to satisfy growing commercial trends.

For the premium commercial market we are introducing a new luxury collection which offers unique textures combined with high style patterns and colors. We have also increased our American Olean commercial offering and added new sales personnel in selective areas for it.

In Mexico we opened our new plant in Salamanca ahead of schedule. The plant is producing a red body tile specifically designed for the domestic Mexican market. Salamanca will reduce our ceramic tile cost and freight expenses when the plant is fully operational by the end of this year. Sales in Mexico are growing dramatically due to our expanded offering of designs, sizes and price points.

Polished porcelain tiles greater than two feet in size are being imported from our Chinese joint venture for the premium commercial market. We are achieving increased distribution for our products with new commitments from our existing customer base, adding new distributors and home centers.

Results for our Chinese JV were impacted by a softer Chinese economy, normal seasonality and extended shutdown as a result of lower market demand. Our sales were bolstered by new product launches, new retail showroom displays, and strong retail participation in our recent conventions. Our export volumes are growing as we increase sales to Dal-Tile's US, Canadian and Mexican markets and add new customers worldwide.

We have concluded the joint venture of Muskogee ceramic production, with the purchase of our partner's interest for $35 million based on our previous agreement.

During the quarter Dal-Tile's lower manufacture -- lowered manufacturing costs drove higher productivity, reduced waste, improved formulations and increased production speeds and recycled content. We are increasing SKU productivity by utilizing more disciplined components. Dropping low-volume SKUs, consolidation of outsized suppliers ought to drive manufacturing and inventory efficiency.

The Tile Council of North America has certified Dal-Tile and it's Green Squared program, confirming our leadership in sustainable manufacturing.

Unilin's first-quarter sales grew by 4% as reported or 7% with a constant exchange rate. Both our European and US business grew in the period despite challenges in the economy and continued pressure on our product mix. The impact of the European debt situation on business has been limited due to lower exposure in the Southern European markets. We continue to gain market share through the expansion of new products, channels and regions, offsetting the impact of slowing national economies.

Laminate wood flooring sales in Europe continued their growth, despite pressure on our product mix as customers traded down. We have expanded our participation in the DIY channel with value-added laminate products under our Quick-Step brand. The growth of these have compensated for the decreases in the specialty retail channel.

We have implemented laminate price increases of 2% to 3% to recover higher raw material costs. We introduced a collection of new larger-sized tiles and wider 8 inch planks featuring reclaimed and rustic designs.

Our strategies to expand internationally are progressing, with our new Russian plant increasing production and our Unilin -- and Unilin integrating our Australian distribution.

We entered into a joint venture with a South American board company, which had a limited laminate flooring business. In the joint venture we are developing new products with enhanced features and styling. And we utilize our Quick-Step brand to differentiate the premium products.

Our Unilin North American business grew as we expanded our Home Center distribution to both laminate and wood. In the US we introduced wider laminate that replicates weathered oak and distressed surfaces in fashionable colors, a collection of distressed solid wood, and new luxury vinyl tiles.

New processes in our US wood facilities are enhancing our visuals and reducing costs in both engineered and solid wood products. Consolidation of our wood plants in Malaysia has been completed, increasing our capacity and reducing our cost. We do have some headwinds resulting from a strengthening Malaysian currency.

Our wood panel volume improved in Europe, but pricing remains under pressure from excess market capacity. Roofing panel sales declined from lower home sales and more severe winter weather.

Our installation panels grew significantly, with our costs improving from high utilization Asian. We are increasing our installation and production capacity and preparing to add another facility in Southern France next year.

We are implementing 2% to 3% price increases in most panel products to recover material increases. Mohawk's reputation for innovation and design was reinforced at the flooring industries' largest annual show in the US.

New introductions in each of our carpet, rug, ceramic and laminate flooring categories were all recognized as the best in the show by the dealers attending. We received Supplier of the Year for Excellence from Wal-Mart, and the North American Laminate Flooring Industry award for best manufacturing company.

Southeastern Corporate Sustainability rankings designated Mohawk, UPS and Coca-Cola as the best companies for sustainable performance for 2012.

Low mortgage rates, increasing home sales, higher employment should sustain industry growth this year. Our emphasis on product and process innovation, cost management and flexibility has resulted in a stronger Company. In the second quarter we anticipate continued sales growth and improving margins as selling prices align with material inflation.

We believe our new product launches will improve profitability and sales growth. Improvement in productivity, inventory management and interest expenses will favorably impact our results. With these factors our guidance for the second quarter earnings is $1.07 to $1.16 per share, excluding restructuring charges.

Our recent investments in new markets, technology, R&D and production capacity will continue to improve our results. We have a strong financial position to pursue new strategic opportunities.

With that we will be glad to take any questions.

(Operator Instructions). Michael Rehaut, JPMorgan.

A first question on the price increases that you expect to more fully benefit in the second quarter. We have seen, I think, over the past two or three years this constant lagging effect in terms of following the higher resins and oil-based materials.

What do you think ultimately this means for margins for the segment over the next couple of quarters on a year-over-year basis as, obviously, on a longer-term basis people are looking towards a return towards a more normal high-single-digit type margin for this -- as this business has historically done?

Most of our raw materials are bought at market based on either some -- either market prices or some contractually agreed upon basis. And so our raw materials go up and down each period. We try to cover what we believe to be the raw materials based on our best guesses, and we think we have done that at this point.

The future raw materials are going to be based on -- did something dramatically happen with oil, and depending upon who you listen to, it could go to 120 or go to 80; we have no idea which. We're going to continue watching them, and if it requires additional changes we will make them. Our best guess at this point is that we are expecting stable material prices in the future, but it could change.

So, but just to make sure I understand it correctly. Looking forward into the second quarter can you give us a sense of -- given that you expect the full impact of the price increases from the first quarter, would you expect there to be 50, 100, 150 basis points of expansion for the Mohawk segment?

Our margins, Mike, will be up compared to second quarter a year ago in the Mohawk segment as a result not just of price increases, but also some of the productivity improvements we put in place. But they will be up year-over-year in the second quarter.

The amounts are built into the estimate. You're going to have to decide what you want to put in each segment.

Right, I appreciate that. Just one last one on Unilin -- I am sorry, on Dal-Tile, great results. You face a little bit of tougher comps in the back half of the year. Based on current trends do you expect to continue to grow at this double-digit rate into the back half or would that moderate due to the comps?

I don't believe that we are going to continue at the double-digit rate going forward. That is a significant improvement over the market, and I would be delighted if it happens, but we are not building that into our forward projections.

Okay, thank you.

Joshua Pollard, Goldman Sachs.

Hey, thank you guys very much. I really appreciate taking the time. You made a comment in your prepared remarks and on your press release about pursuing new strategic opportunities. You talked as well about a new joint venture with a South American board company. I really ultimately trying to understand how deep, how broad and how far you guys want to go with some of the strategic opportunities out there. Are you guys looking to make larger acquisitions given the strength of your balance sheet right now?

Yes. And historically we have grown the business through acquisitions. We believe we are well-positioned in the marketplace. We believe that we have the infrastructure in our business to support what is going on in our businesses. We continuously look at new opportunities in the marketplace.

Typically in the -- as you go through downturns there are more people looking to exit the business as you come out of the business, and we constantly look at whatever comes available in the marketplace in all parts of the world.

I guess one quick follow-up to that. It seems that you guys talk a lot about the international side of the business, but as things stand right now it is less than 20% of your business. Is it right in assuming that you guys are looking outside of the US?

And then from a management standpoint, I remember when I first looked at the Company a few years ago I was surprised to see that the distribution base and some of the management of the different merged pieces were still sort of still intact, and it wasn't necessarily all one sales force, all one distribution.

When you guys think about bringing on new companies is there anything that leads you guys towards doing more consolidation on the operation to the business?

We take each one and each business and we decide what to do with it. What you see is that we basically have broken the US business into three parts. We have a carpet and rug business. We have a laminate and wood business, and we have a ceramic and stone business. Each of those we operate relatively separate from each other. We do get advantages in the distribution system. We do get advantages in the customer relationships. We do get an advantage in finding opportunities in the marketplace.

The reason we don't meld them together further is that the different products actually have different attributes, in many cases different customers buy them. Even when they are going to the same building the ceramic and many planks is bought by someone different than the carpet. And the timing of installation and shipments are done at different points in time. So we use all the intellectual pieces that we have. We use the knowledge of manufacturing and -- but in each case it is unique.

Just to address your question on international, we are looking at international opportunities. We also look at domestic. But we probably look at a few more international I would say than domestic.

But if there are tile acquisitions in the US we are willing to look, and if they make sense we would like to buy them.

Yes, right strategic fit and right valuation.

Well, glad to hear you guys are out there hunting. My other question is around your productivity improvement compared to last year. You called out $100 million last year. I wanted to see what you guys were thinking for full year 2012 and how much of that was realized in 1Q? Thank you guys very much.

I am not sure I have that in front of me. Frank, do you have it?

I think we need to get back to you on that one.

We will have to get back to you the piece. I can tell you that every division has significant internal savings that they're doing based on productivity increases, improvements in the raw material costs, and product innovations to upgrade the mix as we go through. Frank will have to get back to you with the number for the total.

Stephen Kim, Barclays.

This is actually John filling in for Steve today. So conversations we recently had with the builders, they are indicating that consumers are spending more and more for upgrades and in the showrooms and whatnot. So we're just trying to get an idea, just since negative mix seems to have been a theme this quarter, on balance over the last two to three years how much margin pressure have you guys seen just from consumers trading down or negative mix?

It is hard to pull mix out as a separate item because the way price/mix work. And we look at them combined, so it is difficult to pull that out and give you a specific number.

Got it, all right. Well, following up to that, could you maybe quantify just the material cost inflation that you guys saw this quarter year-over-year?

Yes, material inflation was about 27 -- say about $30 million for the whole Company.

Got it. And was that more heavily weighted to one segment?

Yes, primarily in the Mohawk segment.

Got it. And then just recent trends, could you maybe comment what you have seen since the end of March?

With regards to inflation?

No, with regards to volume.

We are seeing the normal seasonality that we expect. We are still optimistic that the industry will grow at reasonable paces. Most people are using about a 4% number this year. It could be higher or lower overall. We see the commercial maintaining the growth rate in the mid-single-digits as they did last year.

And residential looks like it is improving. The big question is what is going to happen to the building segment and how fast it is going to grow? With existing home changes are people going to be more aggressive in their remodeling pieces? We are optimistic they will be better than they were last year.

Keith Hughes, SunTrust.

Just diving into Dal-Tile, are you starting to see any new commercial construction orders or backlog starting to build? Your comments called out commercial renovation.

Remember when new construction, the flooring is the last thing that goes in. So what we are getting now is what was started a year ago or in some cases a year and an half or two years ago. So the commercial, just in the trend as it comes out, once they start building we are six months to a year after the things start building before we even start seeing it.

Second question in the Mohawk segments, will we start to -- for the full second quarter will you be trued up on raw materials, or is there still a little bit of drag at the beginning of the quarter?

In the Mohawk segment we think are going to be pretty close to covering it.

Kathryn Thompson, Thompson Research.

Hi, thanks for taking my question today. Last quarter you talked about increasing your modular flooring capacity. I wanted to get some update on that, and also just a discussion of what trends you are seeing in modular flooring and market share gains you're taking.

We did complete the increase of our modular capacity. We increased it about 35% to prepare the business for future growth. We see modular -- our modular business is continuing to grow. We continue to expand the price points and styling that we are offering in the marketplace. And it has grown to a significant portion of our total specified commercial carpet business.

Maybe taking a little bit more, once again, in your Mohawk segment, could you discuss the differences in growth rates between residential versus non-res? And just on a percentage basis or round numbers would be helpful. And also if you could compare that versus the industry growth rate over the same time period.

I don't know if I could give you that detail. The industry in the first quarter grew somewhere around 3%. We grew in-line with the industry. In our business, the residential business grew slightly slower than the commercial business. The commercial business still outgrew it a little bit. I'm sorry, the commercial business outgrew the residential.

Eric Bosshard, Cleveland Research.

Two questions. First of all, Frank, I think you said that SG&A dollars would be flat for the year. Can you just talk a little bit about how you achieve that in an improving volume environment, and also knowing how you have been taking cost out of the business the last couple of years when things were contracting?

As we have talked about several times, we have been focused on what we can do to improve productivity, improve efficiencies, and how we can do more with less. And we are looking at opportunities from a lean standpoint and consolidation of different functions. And we have done -- and our team has done a great job of taking out cost and combining different activities and reducing costs across all different functions. And we are continuing to focus on that; that is at top of our radar screen today.

The SG&A got leveraged down as the business went down. We are trying to hold the cost where they are -- and the productivity improved. And the SG&A in the first quarter was 0.9 basis points below the year before. So we think we are going to continue dropping the SG&A cost as a percent of sales.

But also, just to make sure I understand it, I understand the percent of sales leverage, but from a dollar standpoint is that also what you're suggesting for the year, you'll spend the same amount of dollars as last year?

Yes, I think the spend will be about the same. We are not going to be -- and the objective is to hold iot flat or it may be a little bit up, but it won't be up much.

Unless the sales go up dramatically more than we expect, which would be a good thing.

David Goldberg, UBS.

It is actually Susan. The first question, you noted that you had deferred some of the promotions in your rug business. As things are starting to stabilize a little bit, are you finding that you have a little bit more breathing room perhaps in terms of your promotion, the timing maybe and the types of deals that you are offering?

I think -- let me change the question. What we said was that our customers were deferring their promotional activities, not us.

Okay.

So what happens is some of the customers that had promotions in the first quarter push them out later in the year; therefore, we didn't have to ship them in the first quarter.

Okay, okay. Then you also noted that you are gaining some traction with the larger builders. Can you talk about maybe how you are achieving these gains? And some of -- maybe in terms of the pricing are you seeing a lot of price sensitivity with these guys or how things are going there?

There is always price sensitivity, so that is not a new activity. I think that we are focused on having the right products for the individual markets. We are focused on creating specifications within each one that adds value to them. We have a series of good, better, best products that make it easy for them to trade the customer up and satisfy their needs. And I think we are aggressively going after all the channels.

Dan Oppenheim, Credit Suisse.

Just a quick question here. With the new product introductions that you have, both in the Dal-Tile and in the Unilin segments, it seems that you are suddenly going for a more targeted niche, likely higher-margin. And if you can quantify that or provide some color in terms of expected margins on some of this new product offerings. I am just thinking about the continuing mix shift going towards those two segments and a bit away from the Mohawk segment where there has been a bit more trading down -- how you think about the overall impact on Company-wide margins?

I'm not prepared to give you specific margins, but you did interpret it properly that in all the businesses there are commodity parts of the business. We are supporting those commodity pieces in the Dal-Tile business. But in Dal-Tile and Unilin we are really focused at improving the mix and improving the products to achieve more margins as we go through, which is how we intend to enhance the margins as we move forward.

Okay, thanks very much.

David MacGregor, Longbow Research.

Any chance of having you quantify the impact of the startup costs associated with your various ventures that are ramping?

On an annual basis we estimate it to be about $15 million this year. The big chunks would be the Salamanca plant start-up, the Russian plant, and then other expenses just associated with all the other capital investments we are putting in.

Okay. And the $15 million, what do you think we saw in the first quarter?

Assume 25% of it and you'll be close.

It is pretty linear, okay. The second question is just looking at the Mohawk segment margins -- and I realize first quarter is always difficult to interpret due to the distortion of the seasonal patterns and everything, but first quarter you put up a 3.6% margin. Certainly better times you got that margin in first quarter up to 5.5% to 7%. And obviously there is a big volume difference between now and when you were peaking out margins.

But I guess the question is how much unrecovered cost inflation are you seeing in the Mohawk segment since the peak?

Since the peak?

Yes, how much unrecovered cost inflation?

I have no idea off the top of my head.

I wouldn't even know how to calculate it.

A lot.

The two things that happened is there has been a tremendous decrease in the volume of the industry. There has been a huge decrease in the mix of the trade-ups where we used to sell much higher proportions of higher-value, higher-margin products. And as the retailers tried to attract customers they started selling prices as the reason to be, rather than trying to sell the thing that fits the need the most.

It is going to change. I don't think we have seen a lot of it yet, but we are expecting as the consumers get more comfortable with the marketplace that we will see a significant improvement in the mix in all the businesses as the economies improve.

Sam Darkatsh, Raymond James.

A couple of questions here. I know you said that your customers with the deferred of the promos in rug, they deferred it to later in the year, and they also drew inventories down. Are you still seeing that activity or the effects of that activity here in the second quarter, or will that dissipate? And then I have got a follow-up question.

We are anticipating that the second quarter will be more normalized, but you don't know until they send you the orders.

But you would already see it in April, though, wouldn't you?

So far we believe the second quarter is going to be more normal, as it. But you never know until it is over.

Okay.

We are anticipating more normalized results in the second quarter.

This is our rug business we are talking about.

Correct, I understand, yes. And the second question, prior to this quarter in the carpet segment you have been pretty consistently gaining share over the past few quarters, and then maintained share largely in this quarter in carpet.

Based on the fact that [Bolu] struggled getting a price increase throughout -- I would have thought the share situation might even have been better than the maintenance. Can you talk about market share trends in the industry, what you're seeing, and prospectively what you would imagine to see over the next few quarters?

Some of the things that makes it hard is that as the -- as we all increase prices we are all trying to identify the future costs of the business and pass them through. And we think there was some confusion in some of the competitors of what the raw material prices were going to be.

So with all those things it impacted some of the pricing strategies going into the year. And some of the competitors tried to raise prices again at a later point, and so all that has to do with how the pricing is and the mix is. So it did impact -- it could have impacted our sales volume a little bit.

But we think that we are set up properly for the future. We think that we are bringing products to the market that add value to it. We believe that we are capturing a greater share of the premium market with the positions we are taking and innovation we are bringing to the marketplace. So we are happy with our position for this year.

Dennis McGill, Zelman.

Can you talk a little bit more about the carpet volumes? I think you said overall it sounds like carpet volumes are pretty stable. And I think you said that commercial or nonresidential outgrew residential. So I just wanted to confirm those numbers.

And then on the residential piece if you could maybe break that down between what you're seeing on the retail side versus any builder business?

What we said was that the industry grew about 3%. And that in our business the commercial business was slightly stronger than the residential business. And that is as detailed as as we are prepared to give you.

But, Jeff, that 3% that is dollars or that is units? Okay, so you're not willing to talk about just generally even how you're seeing the split between retail and nonretail within the residential business?

Retail and nonretail.

You mean builder and the rest of the business?

Right, right.

I am not sure we are able to break that out and give you an accurate number.

I am not sure I have that (multiple speakers). I mean, we could get it. We can -- internally we track some of it, but the same products go through both. We think that there is some strengthening of the builder. But, again, you have to remember that when you build a new house we are the last thing in it. So when they -- at the start you got to add close to nine months before we see it.

John Baugh, Stifel Nicolaus.

And I mean this in a serious, not a funny way, how are you going to hold SG&A flat? I assume there is going to be a material increase in executive bonuses, compensation.

(laughter).

I knew you would laugh, but seriously, have we got other decreases that are going to offset that?

We made a lot of changes in the past 12 months. And we continue to change the business to reduce the costs. We continue to change the business to find productivity. We continue to manage the investments we put in it better. And our goal is to try to hold it flat with increasing volume, because if you want to have higher margins you're going to have to get leverage in the -- as the business grows up, you're going to have to leverage the fixed costs and piece as we go through. And we are doing everything we possibly can.

If the business grows more than we think it is, we are going to have to put more investment in, but we put the actions in to try to hold the costs.

And my second question kind of relates to the bigger picture. And we have talked a lot about the Mohawk division on this call. I'm curious on the Dal-Tile and Unilin could you revisit again, Frank, the -- sort of where you think margins can go to question? In light of Mexico, which is a lower-priced product, some of the things you're doing in laminate or DIY, just to kind of get a feel for how that margin peak years ago compares to where it might go back to in light of some of the changes in the business?

So, yes, if you just take each of the two separately. First Dal-Tile, we still believe we can get margins back up to 13%, 14% range there. You talked about Mexico, and our margins in Mexico, once we get that Salamanca plant up and running and move the production down out of Monterey down into Salamanca we will be in-line with the rest of the tile business in terms of the margins here.

And on the Unilin side we have talked about margins 14% or 15% in that range when we get back to a normalized environment. And that is lower than where we were at the peak. But we have talked about we are trying to increase our market share and improve our position both in the US and in Europe by getting -- moving into the DIY channel a little bit more. And that will impact us favorably from a margin dollar standpoint, but we will see a little bit of decline in the margin percentage from where we were at the peak.

Robert Wetenhall, RBC.

[Yazi] filling in for Bob. Thanks for taking my question. Were there certain geographies or segments where price increases were less effective and maybe unable to keep up with some of the raw material inflation?

I am sure there were, but I don't know it. We go down to individual customers and pieces and markets. I mean, we have to meet market competition where it goes and we adjust them, but we think we are going to recover about what we needed to recover.

And kind of a follow-up. Were there any raw materials that increased in price more than you had expected going into the quarter?

In the Mohawk division, and the Mohawk piece of it is pretty -- up and through the end of the first quarter the raw materials were similar to what we had anticipated in the marketplace. And we spent a lot of time trying to outguess them, and so far we were close to the first quarter. Now what happens from here forward we will have to see.

Okay, thank you.

John Lane, Morgan Stanley.

Hi, thanks for taking my question. I just had a few questions about the -- your paydown of April maturity. My question is do you plan to come to market to refinance that in any way or do you think that you will just pay down the revolver with free cash flow?

We will do the latter. We rolled it into the revolver and we will just pay down the revolver with free cash flow.

All right, great. That was about it for me. So thanks very much.

Mike Wood, Macquarie.

This is Adam in for Mike. Just a quick question on Unilin. Can you talk about maybe the core growth in that segment, stripping out any new products -- I know you kind of called out FX -- or any price or anything like that?.

Your question is what is the organic growth if you pull out new products and acquisitions?

Yes.

I don't know if we can pull it all out. We can tell you that about 1.5% of it came from the Australian acquisition, the net sales increase. A large part of the sales in that Australian business we were supplying from as a supplier, so you have to deduct that from the piece. So that was about 1.5%. The rest of it I can't put a number on.

Okay, thanks.

At this time I would like to turn the call back over to management for closing comments.

We appreciate you being on the call. We think we are well-positioned in the marketplace and we are taking the right actions for the business for the coming year. Have a nice day.

Thank you. This concludes today's Mohawk Industries' first-quarter conference call. You may now disconnect.