莫霍克工業集團 (MHK) 2013 Q1 法說會逐字稿

Good morning my name is Angela and I will be your conference operator today. At this time I would like to welcome everyone to the first-quarter 2013 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions).

Thank you. Mr. Jeff Lorberbaum, Chairman and CEO of Mohawk Industries, you may begin.

Good morning and thank you for joining our first-quarter 2013 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 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 a discussion of non-GAAP numbers. You can refer to our Form 8-K and press release in the investor information section of our website for a reconciliation of any non-GAAP to GAAP amounts. Jeff?

Thank you, Frank. Our first-quarter earnings per share were $0.72 as reported or $0.87 excluding unusual charges, an increase of 50% over 2012. Improvements in the US market, product mix, productivity improvements, lower amortization and the Pergo acquisition all contributed to our results offset by the negative impact of a slower European economy and one less day in the period compared to last year.

For the quarter, our sales increased 5.5% as reported or 5.4% on a constant exchange rate. During the quarter we generated adjusted EBITDA of $151 million and reduced SG&A by 90 basis points relative to sales across the enterprise even as we increased investment in growth areas of the business.

In the US, economic indicators show that commercial building and remodeling continue to recover with the Architectural Building Index and Commercial Lending Market forecasts predicting sustained growth. The National Association of Homebuilders projects 975,000 home starts this year representing a 25% increase over 2012. Harvard's April LIRA Index projects gains in residential remodeling through 2013.

The Russian economy is expected to continue expanding and the European Union countries are anticipated to continue facing headwinds.

In January, we completed the acquisition of Pergo and are well along with the execution of our integration strategy. We are closing both of Pergo's manufacturing plants in Sweden which have antiquated high cost assets. The production will be moved to our modern manufacturing plant in Belgium which will also be utilized as a distribution center for Pergo products along with their distribution center in Sweden to guarantee excellent service levels outside Skandia.

This fall we will update Pergo's European product line with state-of-the-art technology and improve their click installation system while maintaining their best-selling products and unique performance features. This should add significant value to the product offering and increase the enthusiasm for Pergo products in Europe.

In the US, we are enhancing the manufacturing assets and processes to reduce costs and improve quality. In both the US and Europe, our costs will improve as we manufacture much of the board requirements, laminate manufacturing and impregnation requirements that Pergo is presently purchasing.

We have unified the organization by combining senior management teams, sales organizations, logistics systems and administrative functions. The manufacturing consolidation and administrative restructuring will eliminate about 140 positions across the business and will take up to a year to complete at an estimated cost of $35 million less real estate sales of $10 million to $15 million in the future. We anticipate all of our integration and restructuring activities will enhance Pergo's operating margins to a level similar to Unilin's over the next several years.

After the first-quarter close, we completed the acquisition of the Marazzi Group. This transaction is transformational for our ceramic tile business and makes Mohawk the global leader in ceramic tile. The combination will provide many opportunities to improve our performance by leveraging best practices, operational expertise, product innovation and manufacturing assets across the enterprise.

In the US, the Dal-Tile and Marazzi management teams are working closely together to realize synergies and operations in administration. We are preparing to test selling Marazzi in American only and together to offer our customers a wider range of ceramic options. We will improve service and efficiency utilizing the Mohawk distribution system and Dal-Tile will source products from Marazzi's European plants.

In Europe, we have appointed a new president of Marazzi who has an in-depth understanding of manufacturing and marketing with over 30 years of European ceramic experience. We have also pointed the Marazzi US business president who has extensive experience in both the US and European markets to lead the European sales function and refine our present marketing strategies to maximize our position.

We have identified opportunities for expansion in higher growth markets such as Germany, Eastern Europe and North Africa. We are reviewing our manufacturing operations to upgrade technology, improve efficiencies and expand our product offering.

In the faster growing Russian market, we continue to expand our unique approach as a manufacturer, distributor and retailer focused on the mid- to high-end market. Presently we have the number one position in the fragmented Russian market where we own and franchise retail stores. We have direct control of about 50% of our sales all the way to the end customer which builds strong brand awareness with retail advertising at the store level and ensures a superior customer experience through our knowledgeable retail staff.

We are reviewing options for expanding both our product and distribution channels as well as exploring other regional market opportunities. In the future we will expand our manufacturing capacity to support our expected growth in this key market.

While we are in the early processes of going through, we estimate Marazzi's restructuring cost of $15 million to $20 million which will be offset by real estate sales estimated to be about $10 million in the future. Our goal with these actions and longer-term improvements in the European economy is to expand the Marazzi operating margins up to the low to mid-teen range over the next several years.

Acquisition costs for the Marazzi transaction will total approximately $14 million including advisory, service, legal, tax and accounting fees.

Earlier today we announced the closing of the acquisition of Spano for $164 million. Spano is a chip and melamine board manufacturer primarily in the Belgian market with annual sales of approximately $230 million. The acquisition will generate significant synergies to bring greater value to our customers and broaden our product offering. The transaction creates many opportunities to optimize assets, raw material purchases and production efficiencies. We do not expect the acquisition to have a material impact on our 2013 second-quarter results.

Frank, would you please give our financial report?

Sure. Thank you, Jeff. Good morning, everyone.

Sales for the first quarter were $1.487 billion, increasing 5.5% over last year driven by volume in Dal-Tile and Unilin and improving mix in the carpet business. Our gross margin was 25.4% as reported. The margin improved slightly excluding nonrecurring items. We had better mix, higher productivity and increased volume in the US that offset the impact of a slower Europe.

SG&A dollars were $290 million which was flat with last year and 19.5% of net sales and that compares to 20.4% of net sales last year. Better leverage with higher sales and amortization which was lower by $10 million positively impacted our SG&A. Unilin amortization will be approximately $35 million lower in 2013 compared to last year.

Restructuring charges for the quarter were $10 million. This included $2 million in cost of goods and $5 million in SG&A for the Mohawk segment reduction in force with a $3 million balance in Unilin SG&A related to the Pergo integration. Full-year restructuring is estimated at $35 million for Pergo integration costs and an additional $15 million to $20 million for Marazzi, $10 million of which was accrued in the first quarter by Marazzi.

We expect to offset a portion of these costs with proceeds from future asset sales estimated at $20 million to $25 million.

Our operating income excluding charges was $97 million or a margin of 6.5% which is up 140 basis points from last year. Interest expense was $19 million compared to $22 million last year and was impacted favorably by lower rates this year. We are estimating interest in the future to be $25 million per quarter.

Other expense was $6 million and compares to income of $1 million last year. This was primarily impacted by unfavorable foreign exchange.

Our income tax rate was 18% compared to 20% last year. We are expecting the tax rate to be 20% for the full year this year including the Marazzi, Pergo and Spano acquisitions.

Earnings per share excluding charges were $0.87 per share. This is a 50% improvement over last year. Outstanding shares of stock for the first quarter were 69.9 million shares and we are estimating outstanding shares for the full year to be at 72.4 million shares.

If we move to these segments, in the Mohawk segment, sales were $695 million, flat with last year. Carpet sales improved offset by lower rug sales. Our carpet sales were positively impacted by specialty retail and commercial with slower home center sales due to product transitions.

Operating income excluding charges was $31 million with a margin of 4.5%. This is a 90 basis point improvement over last year with new super soft carpet products driving positive mix and with efficiency improvements also impacting our results.

In the Dal-Tile segment, sales were $412 million, up 5% from last year's. The Dal-Tile sales service center and independent distributor channels grew with the home centers lagging due to difficult comps from last year.

The Mexican growth continued to be strong with double-digit growth rates again this quarter in local currency.

Operating income excluding charges was $30 million or 7.4%. This is up 80 basis points from last year with volume and productivity as well as improving performance at our new Mexican plant positively affecting profitability.

In the Unilin segment, sales were $404 million, up 20% over last year with North America and Pergo offsetting our slower legacy European business. Pergo sales in the quarter were about $70 million.

Operating income excluding charges was $42 million with a margin of 10.4% which represents an improvement of 240 basis points over last year due to the lower amortization and increased volume in North America.

In the corporate and elimination segment, our operating loss was $7 million. For the full year, we expect it to be around a $25 million loss.

We have now completed the Pergo, Marazzi and Spano acquisitions. We will own Pergo for 12 months in 2013. Last year sales were $320 million and will be less this year due to discontinued low-end products, lower European demand and delayed product transitions in Europe. We anticipate operating margins of 7% to 8%. Marazzi will be owned for nine months this year.

Sales last year were $1.16 billion and they experienced a 4% to 5% growth rate in the first quarter of this year which is anticipated to be maintained throughout the year. The operating margins for Marazzi are estimated to be 10% to 11%.

Spano will be owned for eight months this year. Sales in 2012 were $230 million and are anticipated to be slightly down this year given the slower European economy. The operating margins are estimated at 7% to 8% for Spano.

At this point purchased accounting has not been finalized and our estimates are subject to change. The timing, implementation and strategies of our integration are still being established and may be revised. We are assimilating these businesses into our existing operations and will not have separate results to report for the acquisitions in the future.

Now we will jump to the balance sheet. We ended the quarter with cash of $1.120 billion. This is up due to the cash that was raised to finance the Marazzi acquisition which closed in early April. Receivables were $826 million. Our DSOs at 47 days were flat to last year. Receivables increased approximately $28 million due to the Pergo acquisition. Inventories were $1.230 billion.

Our inventory days improved to 107 days from 109 days last year. The inventory increased at the end of the quarter about $48 million due to the Pergo acquisition. Fixed assets of $1.730 billion include capital expenditures of $63 million during the quarter and depreciation and amortization of $60 million. The full-year capital expenditure is estimated at $380 million including Pergo, Marazzi and Spano.

Depreciation and amortization is estimated at $310 million for the full year including each of the three acquisitions. Our full-year run rate for D&A is estimated at $335 million.

Our long-term debt was $2.3 billion at the end of the quarter and included $600 million 10 year 3.85% bonds and a drawdown of $130 million on the bank revolver both used to finance Marazzi in our April acquisition. We are currently paying interest at 2% on the revolver.

Net debt to EBITDA was 1.7 times at quarter end and would have been approximately 2.8 times on a pro forma basis if Marazzi and Spano had been included. Jeff?

Thank you, Frank. Mohawk sales were relatively flat during the first quarter with operating income rising 24% excluding unusual charges. Carpet sales growth was partially offset by home center transitions that were completed in the first quarter and lower rug sales.

Our SmartStrand and Wear-Dated soft carpets are growing and positively influencing our product mix and margins. Our sales in the specialty channel continue to show strength and we expect improvement in the home center channel as sales of our new introductions gained traction in the second quarter.

We began implementing a 4% to 6% price increase during the period to offset our material cost changes. However the timing of implementation will not cover an estimated in $5 million to $10 million of those higher costs in the second quarter.

We anticipate the price increases will align with our material costs in the third period. We implemented a freight increase from carpet to offset higher transportation costs. Over the past several years we simplified our business, improved our processes and implemented more automated systems which allowed us to eliminate about 250 positions in management and administration at a cost of $6 million which was expensed in the quarter.

During the period, we built upon the success of our revolutionary SmartStrand Silk collection by adding 12 products that combine silk to unsurpassed softness with contemporary styling. Consumer response has been enthusiastic to our Wear-Dated Embrace, luxurious softness and exceptional durability easy care at attractive price point for premium product.

We are further expanding the soft category by introducing Wear-Dated value products made with our recycled polyester with a compelling environmental proposition. As the differentiated super soft products expand, we anticipate the category will represent a larger sale share of our carpet sales and further improve our product mix. We are increasing extrusion capacity throughout the year to satisfy the increased demand for these products.

Sales of hardwood and ceramic in our Mohawk segment improved with new introductions such as our ArmorMax hardwood that offers unsurpassed wear and scratch resistance and ceramic tile with Reveal Imaging that replicates the rich look of wood and stone surfaces.

During the period, we announced a third price increase of 10% on our hardwood products to offset rising lumber costs.

In the commercial category, our hospitality sales continued solid as we expanded our customer base and as hotels increased the renovation of their public spaces. Our exclusive DuraColor commercial broadloom and tile products expanded due to their exceptional styling, superior stain and soil resistance and improved value. We introduced a new modular floating tile installation system and a new eco-comfort pad which is made of 90% post-consumer recycled content that increases the life of our carpets.

We executed productivity increases across the business resulting in material yield improvements, waste reduction, increased recycled content and improved efficiency. Our new customer management tool has enhanced our sales productivity, identified new sales opportunities and improved our project management.

Dal-Tile sales increased 5% as new residential construction, commercial sales and our Mexican business continued to show strength. Our positive results for the quarter were supported by new product introductions featuring both rustic and polished surfaces, new larger sizes and unique Reveal Imaging designs.

Our margins were supported by higher volumes and improved labor productivity but were partially offset by rising energy costs. Last year the initial inventory shipments of new products to home centers created a more difficult sales comparison in the first period of this year.

In the residential category, our Dal-Tile brand showed good growth from new Reveal Imaging designs and the classic look of travertine and slate, mosaics made of glass and stone and larger format tiles from our Chinese JV.

In the home center channel, we added new sizes, updated our floor tile options and added fashionable mosaics to complement existing lines. In our Dal-Tile brand, we added sales representatives to target new residential construction, expanding our regional builder business. To grow our American Olean brand, we have added representatives focused on commercial specifications in the multifamily segment.

Commercial sales grew in the restaurant, retail and hospitality channels with large projects utilizing high fashion designs, contemporary sizes and sophisticated colors. To provide appealing premium options to the design community we introduced innovative collections that replicate limestone, a value priced porcelain with dual layered construction, and a commercial product that blends re cycled porcelain and marble chips and [earns] lead points.

In Mexico we continue to grow faster than the market by aggressively pursuing new construction projects, adding distributors, improving product mix and expanding our penetration in home centers. Our Salamanca facility's volume efficiencies and yields continue to improve according to our plan.

At our Monterrey facility, we added Reveal Imaging capabilities to both our wall and trim production. To offset cost increases, we announced a price increase of about 3% for tile in Mexico that will be fully implemented in April.

During the period, Dal-Tile improved costs by reducing off quality production and waste, increasing machine efficiency, achieving higher plant utilization rates and enhancing material formulations. We combined more of our regional warehousing with our carpet distribution to reduce our costs. All of Dal-Tile manufacturing facilities have now been certified by third parties for exceeding world-class safety standards.

Unilin sales grew by 20% or 19% at a confident exchange rate due primarily to the Pergo acquisition. The legacy Unilin business sales improved in all product categories in the US and in installation boards and wood flooring outside the US. This was partially offset by lower laminate, wood panel and roofing sales in Western Europe.

Margins improved from increased US volume and lower amortization costs offset by volume, lower mix and material inflation in Europe excluding acquisitions. We increased our laminate distribution to new markets such as Ukraine and initiated promotional actions within established European retail channels. Our new laminate lines in Europe are being well accepted with collections that offer the look of natural wood in contemporary colors as well as long wide planks resembling custom wood floors.

Our engineered wood products with brushed surfaces offer fashionable visuals at affordable price points. Our Livyn Luxury tile line collection has gained traction across Western Europe differentiated by our Quick Step brand, industry-leading realism and an advanced click installation system.

In North America, our laminate and wood flooring sales increased across all channels. Laminate flooring sales were enhanced by introductions with realistic wood visuals and wide planks. Our wood floor products are growing with performance features such as Scotchgard and ArmorMax protection that provide easy maintenance and industry-leading wear resistance, new products with scraped surfaces and fashionable distressed looks.

To offset rising lumber costs, we announced another price increases of 10% for wood flooring that will be effective in late May.

Sales of our installation boards continue to grow with expanded product offering and increase geographical penetration in France and Germany. Construction of our new installation board plant in France is ahead of schedule with production anticipated to begin in the third quarter.

In the period, inclement weather conditions further hampered the difficult economic environment affecting Western European housing construction and reduced our roof panel sales. Earlier this year we consolidate our roofing sales organizations and we will consolidate our two roofing plants in the second quarter while maintaining the ability to respond to a future rebound.

During the period, retailers at the industry's largest US trade show voted Mohawk brands as having the best new products and most flooring categories including carpet, ceramic tile, laminate and area rugs. Training Magazine placed Mohawk eighth in their national rankings and Mohawk was the only manufacturing company in the top 10 for the second consecutive year.

We delivered solid results this quarter through product innovation, productivity improvements, market expansion and strategic acquisitions. In all areas, we are driving costs and sales initiatives to enhance our results. We are implementing price increases as required though our carpet prices will lag our costs in the second quarter. We believe that both commercial and new housing growth will continue this year and we are anticipating some improvement in the residential remodeling.

We remain optimistic about the long-term prospects of our international businesses even while challenges persist in some regional economies.

In each of these regions, we have leading market positions, highly recognized brands, outstanding distribution channels, and efficient manufacturing that will benefit our results as those economies improve. We anticipate each of our acquisitions contributing to our sales and earnings this year as we implement strategies to maximize their potential.

With these factors, our guidance for the second quarter earnings is $1.58 to $1.67 per share excluding any restructuring or acquisition costs. Our focus in 2013 remains on creating differentiated products with appealing value proposition and successfully integrating our recent acquisitions.

For two decades we have created significant shareholder value having a dual strategy of growing our established businesses while enhancing performance of acquired companies. We have an experienced management team with the resources and talent to execute these strategies. Regardless of the pace of the recovery, we remain committed to driving innovation, operational excellence and geographic expansion to optimize our business.

Finally in connection with our recent acquisitions, we are changing the names of our segments to refer to product categories rather than historical brands. Going forward, the Mohawk segment will be known as the carpet segment; the Dal-Tile segment will be known as the ceramic segment; the Unilin segment will be known as laminate and wood segment. This will not change either the brand or sales strategies that we utilize today.

With that we will be glad to take questions.

(Operator Instructions). Stephen Kim.

Thanks very much, guys. Thanks for all the additional color as well. I wanted to talk to you about your current balance sheet and acquisitions in that context. It seems like you have a net debt to EBITDA well below two. It seems you have some room to either do buybacks or possibly additional acquisitions. I was just wondering how you see the balance between these two options given -- in particular trying to understand do you have the capacity right now operationally to absorb any additional acquisitions in the next six to 12 months?

I may not have been clear on that, Steve. The pro forma debt to EBITDA with Spano and Marazzi will be about 2.8 times.

Oh it will? Okay.

Yes, yes. The short answer is we are really going to focus on paying down debt and integrating the acquisitions.

Okay, great. That is very helpful. If I could ask a follow-up here talking about your guidance that you gave, I think you made a commentary about Pergo margins ultimately after the integration actions having margins equal to Unilin's. And I just was curious, did you mean the Unilin segment overall or did you mean Unilin's laminate margins because my understanding is the laminate margins are higher than some of the other products that Unilin has.

The laminate margins are higher in the division and we expect to be able to raise the margins significantly over the next year as we implement all of the strategies we went through.

That is encouraging. Thanks very much, guys. Great job.

You are welcome.

Michael Rehaut, JPMorgan.

Thanks. Good morning and great quarter, guys. First question, just wanted to clarify also around the acquisitions in response to Steve's question, the operating margins, is that going to -- I don't know if you exactly answered Steve if it is going to the Unilin overall corporate average or the above average laminate business?

Also in the estimates that you have for at least 2Q '13 I would assume that it doesn't include any of the payback on the restructuring?

I will answer the last question first. The estimates we have for next quarter -- and we have got these three acquisitions and a lot of moving parts in each of the three acquisitions, so it does include some of the savings that we are going to get from some of the integration that we have already completed but we've still got a good bit more to do.

And the margins, we believe that we are going to be able to get the Unilin margins back to the low to mid teens and we would like to have the -- we expect to have the Pergo margins in the same range.

Okay, great. Thank you. I guess the second question on the Mohawk carpet segment you pointed to still lagging inflation in the second quarter. I guess really kind of two parts because it would be helpful to understand what is going on in the Mohawk segment.

On the top line can you give us a sense of how much the product transitions negatively impacted overall top line growth, number one? Number two, I would assume some of that would come back and with that coming back in 2Q, would you still expect year-over-year margin expansion even with the cost inflation lag?

We don't break out the margin by individual products within the segments or the sales. But we do expect the growth rate to increase in the next quarter. It was also impacted by about 1.5% with the less day in the period. We are expecting the sales to increase as we go through the year both from the actions we are taking as well as improvements in the markets.

We should also, Mike, see improvement in the margins as we move through the year both from mix and productivity.

That is on a year-over-year you are talking about?

Correct.

Thank you.

Mike Wood, Macquarie.

Thank you. You had mentioned the impact of weather on your roof panel sales. But broadly speaking Unilin within Europe, we have seen also some weather related weakness from your peers. Can you sort of quantify how shipments and orders were impacted and what you are seeing so far this quarter related to that potentially coming back?

We have the same thing in our business with the one less shipping day is about 1.5% impact in Europe. We see Europe continuing with soft volume under pressure in all of the businesses in Europe. Our legacy European sales are down some more, some less than about 10% in the different pieces. However, we are offsetting some of that by growth in new channels as well as new geographies.

And I would say from the weather perspective, the products that were most significantly impacted would have been the roofing panels.

Anything related to construction.

And laminate less so.

Got it. Also within the Mohawk segment, can you sort of just go through some of the moving parts there in terms of mix shift impacting margins like the polyester mix or lower-end, lower margin sales, SmartStrand and Embrace which could potentially be helping you right now and the impact of area rugs?

If you look at the different categories we are increasing our sales of higher value products which we call all the soft products under multiple different brands and we think we are changing the premium market in carpet so that is helping our margins.

We are continuing to reduce the sales of our old staple products that are headed close to zero over this year we get through. There's some of those legacy left. There is a transition away from poly-propylene products that is going on and replacing those is growth in the polyester business.

Polyester is basically selling in the mid-to low-end part of the market place as when people go above there they prefer to have the extra benefit of the higher value nylon and triexta products that we sell.

I guess some of the other margin things that are going on. The mid part of the market is not growing as much as it should be because of the replacement business so we expect that business to pick up as it goes through and so you have higher growth in our business at the lower end and at the higher end.

Great, thank you.

Ken Zener, KeyBanc Capital.

Thank you. I wonder if in the tile business domestically if you could talk about on the nonresidential side actually bidding or what you are seeing in terms of obviously residential is turning but in terms of the nonresidential, how does that look to you guys?

Commercial business's growth was stronger than our residential business and ceramic business. We see that the specifications are increasing. We see more activity going forward so we are positive about the business that goes through expecting it to get stronger.

And I guess the particular areas -- are there particular industries I mean generally things like education and government are cited as weakness. So are there particular areas that you would like to call out?

Hospitality has been strong in both carpet and in tile and we have seen strength in healthcare as well. Some of the commercial categories are doing better.

Okay. Good. Then I guess the margins that you guys laid out for the acquisitions you said you hadn't finalized your purchase accounting yet. But were those margins that you gave including purchase accounting as you now model it?

Yes, Ken, that is our best estimate. We are long on the Pergo acquisition because we've obviously had it longer and then Marazzi and Spano, those are our estimates that we are hopeful that we are fairly close.

And in terms of seasonality of sales, would you put any real thought into how those months of sales fall in, any big seasonal variation?

Just like with the legacy Mohawk business, it experiences the same kind of seasonality first quarter is going to be the slowest in each of those three businesses.

The only difference would be the European business and August is slower where the US businesses aren't.

Because the holiday season manner.

Great. Thank you very much.

Dan Oppenheim, Credit Suisse.

Wondering -- we are talking about the laminate wood business with Pergo in terms of shipping and production from Sweden to Belgium. Wondering as you do that, how much cash are you going to have in terms of the Belgian capacity then?

I don't know exactly the numbers. We have enough capacity to support the business and the growth that we need. We have some assets that will be moved to make up any shortfalls that we have. We don't have any limitations to our business.

Okay. Secondly, within the ceramics business then, you talked about the distribution with Marazzi in Russia in terms of owning the retail and controlling that distribution. What are your thoughts on that more broadly? As you have looked at that, is there any thought in terms of just more of that activity in terms of controlling distribution through retail?

The difference is that the Russian market has been just changing in the last 10, 15 years and so as it develops, Marazzi built a retail distribution channel there. I don't believe that you can take that and replant it across the world in developed areas.

Thank you.

David Goldberg, UBS.

Good morning. It is actually Sue for David. Can you speak to the pricing that you get on some of the new products that you've introduced? Even if it is broadly across the different segments? As you raise prices on those, do you have more pricing power there such that you are not just able to make up for any changes in the raw material costs, but are you actually able to add to the margin at all with those products?

The answer is the product introductions had different margins based on the value added difference and as you go up in the higher end of the spectrum, there is more differentiation, as you go down in the bottom end of it, you have commodity products with very limited differentiation. When we introduce products we try to introduce products that have higher margins than the products we have sold before and replace old dropping products with better margins as we go every year.

We attempt to introduce products to cover the raw material costs that are there so that we don't have to raise them but it doesn't always work out that way.

Okay. So right now though you are basically just sort of keeping up with the raw material prices you are seeing?

Well, our goal is to do better. As you can see, we think we are expanding the margins in all of the businesses and some of the actions are related to how we are managing the product mix.

Okay. Then in terms of the sort of overall buying trends, are you seeing that people are stepping up at all and maybe moving away from some of the higher value stuff that we saw in the sort of depths of this downturn that we have been through?

We don't see a major change in the average pricing of the different categories. What you have is the lot of the new construction business tends to use lower quality products so as it grows, it is offsetting some of the higher value products or selling a remodeling piece. What we really need is remodeling business to recover and you will see a significant change in the mix.

Okay, thank you.

Dennis McGill, Zelman & Associates.

Could you guys talk a little bit about -- I think you said 4% to 5% growth for Marazzi in the quarter. Can you just talk about that a little bit geography by geography and what you're seeing across the three major regions?

Sure. It is consistent where with where we are. The Russian business is growing the fastest, the US business is second and the European business actually showed growth by growing the business outside of the southern part of Western Europe into other areas of Europe into Eastern Europe as well as into northern Africa. And so we are focused going forward on maximizing the business in the areas that are doing better and that is what we intend to do.

And just to clarify that on the Russian side, how fast growth is that?

I think it is around 10% but I'm not exactly sure on the exact number.

Okay. And then separately on the Mohawk segment, the carpet business, how do you guys think about sort of what a good outlook would look like in a recovery scenario? There has been a lot of different timing issues related with some of the home center rollout mix, the rugs, maybe a lack of home improvement growth trailing some of the other industries out there.

Where do you see the volumes going once some of this stuff normalizes out as you look out over the next couple of years? What would you consider to be a strong recovery type scenario in that category?

You have to start out with an estimate of what is going to happen with the entire flooring industry. If you assume -- it depends how long a time period -- if you assume about a 5% increase, what you will have is the carpet piece should be below there on average over the period and the things that are growing faster such as ceramic will be higher.

Now a lot of it also depends on the mix in category. So ceramic has a much higher percentage of its business in new construction for example and the carpet side has a much higher percentage in remodeling. Then you have different amounts going into commercial. But I mean in general I think if you see a 3% growth rate 3%, 4% growth rate in carpet over X time while you have a 5% in the industry, it would be a good growth rate.

The biggest thing with carpet right now is that remodeling side. That is over 50% of the total and once that remodel, the pent-up demand comes back that should really impact the carpet business.

But you see that kind of growth as during a recovery scenario or a more normalized longer-term cycle?

It depends on what you are calling a recovery. Are you calling a recovery in the next 12 months or the next five years?

Let's say the next two years.

The next two years -- then you've got to decide what the average growth of the industry is going to be.

Your point is carpet will under grow the foreign category overall?

It will. I mean if it pick 6% or 7%, it will go up with it.

All right, thank you.

Sam Darkatsh, Raymond James.

Good morning, Jeff, Frank. A couple of questions. First off a housekeeping question, Frank, and if you mentioned this in the prepared remarks and I missed it I apologize. The $5 million to $10 million negative impact in Q2 from the FIFO accounting from the price increases, what was the negative impact in Q1 so we get a sense of what that means sequentially?

It was not a negative impact in Q1. It impacted us because we were buying in Q1 and it is hitting our P&L in Q2 so it was the raw materials we were buying in Q1 that we are talking about.

Got you. Okay, so the timing of it even though it was not as the quarter ended per se, it still was a de minimis negative impact to you in Q1?

Correct.

Then next question, you are renaming the Mohawk segment the carpet segment. Remind us generally speaking how much of that segment at this point is actually carpet versus other things like textiles and rugs and pads and hard surface, that type of thing.

The majority of it is carpet.

Two thirds, three quarters, how do we gauge that?

We don't break out each of the pieces by product.

Okay. Last question and then I will defer to others. A small competitor of yours the other day mentioned that April carpet sales at the specialty retail side was a little soft. Do you think that is systemic in the industry or is that perhaps more company-specific for them?

We are expecting the second quarter of our business to improve. We have a lot of initiatives that are making it. I don't really have industry numbers at this moment. We are expecting ours to do better and we are expecting our margins to improve. You heard us also take significant costs out of the SG&A, that will start showing up in the second quarter and going forward so we are trying to make our business better no matter what happens.

Got you. Thank you very much. Helpful.

[Stephen Maguire], Longbow Research.

Good morning and congratulations on all of the progress, guys.

Thank you.

I guess the question is somewhat hypothetical in nature. I mean you have got an awful lot of irons in the fire here. You are investing in people, you are investing in new products, you are ramping plants in Mexico and France. The list goes on and on and on.

You've put up a 6.5% EBIT margin for the first quarter, any sense of what that margin would have been if you were to exclude all of these investments that you are making?

No. They all get intertwined together.

Do you track them in terms of what the burden is to the P&L? Is it 100 basis points or 200 basis points?

We do that internally but we are not prepared to talk about specifics at that level of detail.

Okay. In that case let me just ask you about the French new installation board plant. What do you think that would support in terms of incremental revenues at full capacity?

Probably about EUR100 million.

About EUR100 million? Okay, terrific. Thanks very much, guys.

John Baugh, Stifel Nicolaus.

Thank you, good morning. Glad to hear you're doing perfect, Jeff. I wanted to dive into the Mohawk segment and I guess just better understand the moving parts there. Everything being equal we had 1.5% less volume just because of the short day, do I understand that correct?

That is correct.

I wasn't clear, I guess with that 1.5% incorporated, were carpet volumes up overall, flat overall? I mean it sounds like they were up in specialty and commercial and then they were down in the home center channel. But did it net out to flat in volume which really would have been 1.5% positive with the extra day?

The volume probably would be flat to up slightly.

With adding back the 1.5%?

Across all of the pieces.

And then we have heard about rug sales being slow for quite some time now and the home center issue. I guess we are going to start lapping that. When do we lap that and maybe some more color on precisely what is going on in rugs? Thank you.

The home center piece by the end of the first quarter, we have the new introductions in and then we should start seeing improvement in the home center piece. The rug piece, we continue to see by the retailers a focus on reduction of lower price points. So what happens is the unit prices continue to decline as they keep pushing down the mix within the retail stores of what they want to advertise.

So with that, the carpet sales have gone down with the reduction -- the rug sales have gone down with the reduction of the selling prices as well as the demand in those things have also been reduced.

We have continued to reduce our cost structures and are maintaining our profit levels as it happens. At the same time we are focused on growing various channels within it. There is a specialty retail channel that we think is growing and can improve our mix which we are planning on doing this year. E-commerce continues to grow and we are trying to drive more fashionable higher value rugs to improve the mix.

Great. Thanks.

Keith Hughes, SunTrust.

In the prepared commentary or one of the questions I can't remember, you had talked about the Mohawk segment. Are you expecting the volumes to improve in the second quarter and is that industry or is that from your own initiatives?

We are expecting the industry volumes to be up a little bit and we are expecting to do better than the industry.

The last several quarters you have done a little below for a lot of reasons that you have mentioned several times. Are we just anniversarying some of those problems or is there something else?

I think we are improving our position.

Okay. And the price increase, you expect it to be fully in by the end of the second quarter, is that correct?

Yes, but there will be a shortfall in the second quarter which we don't expect to have in the third.

Okay, thank you.

Robert Wetenhall, RBC Capital Markets.

This is actually Desi filling in for Bob. On the SG&A line, that was really excellent in the quarter and I was curious how we should think about that over the course of the year especially once you bring in the -- the acquisitions and how their SG&A margin compares to your own?

We are going to continue as we move through the year, we are going to continue to see improvement as we leverage the SG&A expenses against better sales.

I think you have to answer it as two pieces. One is the legacy businesses we expect the percent cost of sales to continue going down as we manage the costs, the business is coming in, we are homogenizing those costs and taking costs out but many of them are above where we are so there are really two different answers.

Okay. That is helpful. Then also in the Unilin segment with the wood flooring price increase, how do you expect that to -- versus the rising wood costs, do you expect to have a lag there at all or is it going to be pretty smooth?

Now remember with our business in Unilin, it is a -- the wood business is a portion of our US business which is smaller than our European business and then that is only a portion within it. So it is a limited piece of the total. The prices will go up and it will help offset some of the costs that we have and improve it, but it is not going to be significant to the total.

Okay, thank you.

You are welcome.

I would like to turn the call back over to Jeff for closing remarks.

Thank you for joining us. We think that we are well-positioned going forward in our legacy businesses and improving both the mix and the products. We think that we have made the right acquisitions at the right time and we expect our business to continue improving over the next several years. Thank you very much for joining us.

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