Mohawk Industries, Inc. (MHK) Q2 2008 Earnings Report, Transcript and Summary

Good morning. My name is Jody and I will be your conference operator today. At this time, I would like to welcome everyone to the Mohawk Industries Second 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 July 22nd, 2008. Thank you. I would now like to introduce Jeff Lorberbaum, President and CEO. Mr. Lorberbaum, please begin.

Good morning and thank you for joining us the Mohawk's second quarter conference call. With me, I have Frank Boykin, our CFO. We appreciate your interest in Mohawk and we'll review the current environment, the performance, and our strategic direction. Before we proceed, Frank will review the Safe Harbor statement.

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. You can refer to our press release for a reconsolidation of any non-GAAP to GAAP amounts. Jeff?

Thank you. Our results for the second quarter were impacted by the slowing economies in the U.S. and Europe and rapidly increasing commodity costs. Second quarter net income was $89 million and diluting share... and diluted earnings per share was $1.29. Net sales for the quarter were $1.8 billion, reflecting a decline of 7% from 2007. During the quarter, our cash flow from operations was $267 million, and we paid $183 million of our debt. Our debt-to-capitalization ratio improved to 30%, and our debt-to-EBITDA ratio was 2.3%. Declining U.S. home construction and residential remodeling, slowing European demand and rising raw materials and energy costs have contributed to the flooring industry cyclical decline. The rapidly increasing costs are stressed on our margin, even as we raise selling prices to offset these costs. All of our management team remains focused on improving our market position, increasing quality, introducing innovative products and providing excellent customer service. The team is relentlessly pursuing cost controls, working capital management, and process improvement to manage through cycle. We believe all of these efforts will better position our company when the market improves. Frank, could you review the financial information please?

Sure I'll be glad to, Jeff. Starting with the income statements, as Jeff had said, our net sales came in at $1.840 billion or about 7% below last year. All segments are down on a constant exchange rate basis and if we exclude acquisitions, due to the declining U.S. and European economies. Our gross profit was impacted by lower volumes and higher raw and material energy costs and 26.2% of net sales were about 200 basis points less than last year. SG&A expenses came in at $337 million, which is an improvement over last year by $21 million, as reported, or if you look at it on a constant exchange rate basis, it was actually $28 million better than last year. We continue to emphasize cost savings and reductions in this area, but are impacted by lower leverage with lower sales. Interest and other expense; interest came in at $33 million lower due to lower debt levels as we pay down our debt from strong cash flow. And other expense and income was less favorable due to the impact of foreign exchange. Income taxes, the rate for income taxes for the quarter was 20.5% that compares to 28.8% last year, improved over last year, as a result of the tax planning we put in place late last year. We were also impacted this year on our tax rate as earnings in Europe were lower, and we have a fixed amount for permanent tax deductions, which with the combination of those tow things, gives you a lower effective tax rate. We expect our tax rate going forward for the rest of this year to be in the 20% to 21% range. Our earnings per share at $1.29 were 23% below last year. Moving to the segment information, the Mohawk segment sales were $968 million or 13% below last year. This segment was most impacted by the U.S. residential decline. Operating income in this segment was 3.6% of net sales, with margins being squeezed by lower volumes and rapidly increasing raw material costs. Our Dal-Tile segment sales at $482 million were 5% below last year but they continue to outperform the industry even with a decline in sales. Operating income came in at 12.1% for the Dal-Tile segment, and they were most impacted by higher energy and freight costs, during the quarter. The Unilin segment sales, at $412 million were 13% better than last year. If you look at sales based on a constant exchange rate basis and excluding the Columbia Wood acquisition from last year, sales would have declined by 7%. We saw declines both in our European businesses and our U.S. businesses with sales. Operating income was 14.6% of net sales with operating margin, excluding the Columbia acquisition, which we had a loss on during the quarter of $5 million, coming in at 17.2%. Foreign exchange favorably impacted our operating income by $8 million for the quarter. In the corporate and eliminations segment, the operating income loss was $7 million for the quarter, and we expect to run about $30 million for the full year. Jumping to the balance sheet and looking at receivables, they ended the quarter at $982 million. Our days sales outstanding and receivables for the quarter were a little bit over 45 and a half days compared to 44 days last year. The increase in days was impacted primarily by channel mix with our aging... our account receivable aging still in good shape. Inventories ended the quarter at a million... at $1.250 billion with our turns coming in at 3.9 times for the quarter compared to 4.1 times last year. We did generate cash with inventories decreasing $45 million from the end of the first quarter to the end of the second quarter. And also, included in our inventories at the end of the second quarter of this year is about $50 million related to the Columbia acquisition that we did not have in last year. Inventories were impacted by raw material inflation, by buying ahead of the price increases and then also declining demand. Under fixed assets, we spent $50 million of capital expenditures and that compares to $75 million in depreciation and amortization. We continue to estimate CapEx for the year between $225 million to $250 million with depreciation and amortization expected to come in at about $300 million for the full year. If you look at long-term debt, we ended up at $2.1 billion with long-term debt. We paid down $183 million of debt during the quarter, improving our debt-to-capitalization ratio to 30% and our debt-to-EBITDA ratio at 2.3 tines. Jeff?

Thank you. The environment in the second quarter continued to deteriorate in all our segments but decline in demand and cost increases reduced the margin. Price increases, cost cutting and process improvements are the focal point of all our business segments. The Mohawk segment's performance is under pressure with sales declining 13%. Both the residential remodeling and new construction have deteriorated and show no short-term indication of improving. The commercial and rug products are performing better while the hard surface and the cushion products are declining more than residential. We see customers in all product categories trading down in quality as their budgets have been constrained by rising food, gas and healthcare costs. During the second quarter, we announced two carpet price increases: one in June and one in July, for a combined increase of about 10%. The increases will be implemented through the third and fourth quarters but are lagging the cost changes. Higher energy, materials and freight costs are causing dramatic cost inflation. Many of our raw materials are going up 30% to 50% from the first of the year. Polyester is increasing less than nylon and polypropylene, making it a better value for the consumer. The major focus of residential is on the retail replacement category through independent dealers, home centers and multi-family. In both the home center multi-family channels we received additional commitments which should help us in the fall. Our mid-season product launches are getting into the stores, and we've satisfied specific style and performance needs as well as filled some value positions which have been vacated. In the Mohawk wood, we've lunched the first phase of our new product direction, focused on the medium to high end with a visual with differentiated visuals. We'll begin the second phase of the introductions in the third quarter. Our commercial products continue stronger than residential but we're anticipating them slowing in the future. Our new brand strategy, our four brands in the distinct markets with different value proposition and sales focus has been executed. We are increasing our commercial carpet tile offering with new value, performance and stylized tile options. We also introduced carpet tile on our main street channel, which is not specified by project. We introduced a new hospitality product called Synthesis, which is expanding use of printed carpets from Durkan and to hotel areas historically using other product. We continue to invest in our Greenworks environmental initiatives, which have been well accepted by our customers. Mohawk flooring has many initiatives to improve productivity, material yields, quality and service. Controllable direct labor and material yields are favorable compared to last year. Many process improvements have been executed improving cost and quality. New supply chain systems are being implemented and next year we'll improve service, working capital and productivity. Reductions in our infrastructure have been made to balance costs with business condition. All new capital investments in the category are focused on cost and quality improvement. Dal-Tile sales are down 5% during the quarter and are doing well through the difficult environment. The U.S. commercial and Mexican sales growth continue to buffer the impact of the declining U.S. residential industry. Our new direct ceramic collection is providing an alternative for our large customers, who are importing ceramics in bulk today. With large commercial accounts, we are expanding the specification of our products and increasing our penetration. Most of our new product introductions are focused on the commercial end users. New product placements and home centers will improve our share in the channel in the fall. We are producing exact size rectified tile that will broaden our ceramic offering and strengthen our position. We opened three new service centers in the West where we believe we have opportunities to grow. In July, we purchased a stone center in North Carolina to expand our national presence in stone. The major factors affecting Dal-Tile's margins are rapidly rising energy and increasing freight cost, along with consumers trading down in quality. We've increased product prices and energy surcharges in the second quarter to help offset the rising costs. Given the cost changes that are occurring, it may be necessary to increase ceramic prices again in the third quarter. Manufacturing is operating well, and we're producing many products that were previously sourced externally. Many cost initiatives are being executed to improve labor productivity, control expenses, and reduce energy consumption. Freight costs are being reduced by utilizing lower cost transportation modes, increasing weight per load and more direct shipment. By the end of the year, new systems to enhance our local service centers will be tested and ready to implement across the business, to improve service levels, productivity and inventory turns in our local service centers. We are improving the use of working capital and reducing our inventories. In the third period, higher costs and lower volume are expected to continue pressure on margin. Unilin sales, as reported, were up 13% over last year and down 7% on a constant exchange rate basis, excluding the Columbia acquisition. In the last couple of years, Unilin has had extraordinary results with last year at an all time high. With indicators we've been on [ph] that we didn't believe that these results were sustainable over the long term. Sales declines were experienced in the U.S. and much of Western Europe with Russian and Eastern Europe continuing growth. Laminate sales in Europe were weakest in the UK and Spain. Our premium positioning of laminate in Europe is holding up better than the overall market. Our laminate MDF core sales and pricing are down, reflecting a slow market and additional new capacity, which has come into the European market. Our IP revenue has also fallen along with the industry's volumes. Oil based materials and energy inflation continue to increase the cost of most of our products in this category also. A 5% to 6% price increase is being implemented in the U.S. laminate business during the third quarter. The new laminate capacity in the U.S. will be operating in the third quarter and will reduce the cost of our higher end products, presently imported from Europe. In our roofing and other wood products, roofing has maintained its performance while our other wood products were down with the slowing European construction cabinet and furniture markets. Our external sales to these markets and other manufacturers were at cyclical high pricing and volume level in 2007 and are headed towards cyclical lows. In the third quarter, we anticipate continued slow demand and additional plant shutdowns in Europe, affecting overhead absorption and increasing our costs. Unilin has many initiatives to lower cost to modify processes and materials as well as reduce energy consumption. The wood business of flooring [ph] lost $5 million in the second quarter due to lower industry volume and customers reducing inventory anticipating new products being launched. Higher sales that distressed inventory were incurred, as a result of the product line repositioning we are doing in the both the Mohawk and Columbia brand. The wood flooring operations have made significant improvements in manufacturing processes and material yields, reducing labor and improving quality. We've implemented new information system and internalize outside wood purchases so far but the negative overhead absorption is increasing costs. We expect our new product strategy will improve both our wood sales and our product mix. In the third quarter, the outlook remains challenging, given the difficult business environment. Slow demand and higher materials and higher energy cost will continue to compress our margin. As a result, we are raising product prices and transportation fees on most products but continue to lag the increases in costs. We will adapt our strategy to a continuously changing environment Based on these factors, our guidance for the third quarter 2008 is $1.06 to $1.15. We have many focused initiatives underway to reduce costs, maximize working capital, improve service and bring new products to the market. We remain convinced that Mohawk will be stronger as we come out of this cycle. With that, we will be glad to take any questions. Question And Answer

[Operator Instructions]. Your first question comes from the line of Sam Darkatsh with Raymond James Sam Darkatsh - Raymond James & Associates: Can you hear me, okay?

Yes. Hi Sam, how are you? Sam Darkatsh - Raymond James & Associates: Very good. How are you? First off, Frank, you mentioned that the tax rate... it is little bit of housekeeping question... 20% to 21% was that for the whole year or was that for the second half of your expectations of that tax rate?

The second half. Sam Darkatsh - Raymond James & Associates: Second half. Okay, thank you. And Jeff, I guess, you and I talked about this at NeoCon a little bit. At what point do you look at the pricing structure of how you go to market and maybe look more towards a variable pricing method either including surcharges or some sort of indexed pricing methodology to make it easier for you to continue to pass along the dramatic inflation that you are seeing? And are we anywhere near there or is it just issues with that make it very difficult to do so?

The issues that make it difficult are that our customers are not used to variable pricing in that if they make a sale, they would like to know what their costs are going to be. And if you go through a variable structure, it would change constantly. And so we think that it's difficult to move the industry to that but as it keeps changing it may have to be a consideration over time. Sam Darkatsh - Raymond James & Associates: And then finally, you mentioned that the commercial end markets are a little bit better than... considerably better than the residential end markets. But you anticipate them to slow. Are you seeing them moderate at present or is that an expectation that you are hearing either from the field or based on macroeconomic indicators that you follow?

What's happening is there are less projects being brought up. We perceive there is some slowing; we believe that, we have built into our forecast that they are going to slow in the second half in it. They continue to perform much better than the residential, but given the environment and the different pieces going on with the economy, and business, our assumptions are they're going to slow. Sam Darkatsh - Raymond James & Associates: Thanks very much.

You're welcome.

Your next question comes from the line of Michael Rehaut with JP Morgan.

Actually Ray Huang in for Mike.

Good morning Ray.

Good morning. I wonder if you can give some color on the new U.S laminate facility. I wonder if you can give the... in the press release you guys mentioned that there is currently some higher end product being imported from Europe. I wondered if you could quantify how much that represents at Unilin and also what if you had quantified any cost savings associated with it?

As the duty have changed the importing of our products continues to increase. The new equipment that we have installed is more sophisticated and can do, look that we could only do historically in Europe. In making the change you end up with freight and duty changes as you go through you eliminate the currency impact. It will improve the overhead absorption in the U.S. market though it will negatively affect it a little in the European market as we move it. And then it also offers opportunities to move some working capital due to the time it's on the water and reduce that. The capacity that we put in is about 100 million square feet of new capacity in the plants, which we believe, will also help us provide additional product as the business grows in the future.

Okay, that's helpful. But do you guys... I mean, would that be in the ballpark like 100 basis point improvements, 200 basis points?

It' s only a limited portion.... I don't have the number in front of us, but I mean it's still only a limited portion of the total business. And it's not going to move the margin dramatically, plus Dal-Tile business.

Okay and then, just on the sales growth in the second quarter, just wonder if you could give a breakout of how much of that growth was due to the price and how much was due to volume, by segment?

Well, There was no growth due to volume for the most part.

Lots of decline and thing....

We don't really have that information right here in front of us, right now.

If you want to call Frank, he will get it for you afterwards.

Okay fair, thank you.

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

Frank, good morning Jeff.

Good morning.

Hey David.

I guess a couple questions. First of all, how is the mix of distributed product versus manufactured product changing? You mentioned, Jeff, in your prepared remarks that you are more products into your manufacturing. And I sense that maybe the distributed portion is declining. Can you help us understand maybe how that has changed over the last few quarters?

The comment was related to Dal-Tile and Dal-Tile historically, we've had as much as 35% or more of the product we sell of the ceramic product that we sell imported, and supply by outside sources. As the volume in the industry has slowed down, we have reduced that to 20% or less, and what's left is basically looks that are differentiated that either we chose not to make or they take very specialized production to make them.

Was that more high differentiated low turn type of product?

Correct. They are much more at the extreme end of the product differentiation in the ceramic business, and we're still in our product line using those.

Okay. That's helpful, thanks. I guess the other question is just thinking about fourth quarter, you've laid out third quarter guidance for us, which we appreciate. But how could things get better in the fourth quarter at this stage or should we think of the fourth quarter as looking a lot like the third quarter at this point?

Our crystal ball doesn't work any better than yours. The things we have to... that impacted, I guess, they are dependent on these assumptions. And let me start with just the assumptions in the third quarter, which is first, we've assumed that demand in the U.S. market is going to continue to be under pressure and will be lower than... will continue lower that Europe will continue to be more affected by the U.S. financial problems going on and that the European market will slow. We've assumed that the U.S. commercial market will start being affected. We have started with the assumption that even though energy and oil have... if oil prices have declined in the last couple of weeks, that they are going to continue to be very high, and that energy costs are going to remain at high levels. We've assumed that the raw material prices are still behind the oil prices, and there is still more oil inflation that will come to our raw materials during the third quarter as we go forward. And with this, the raw materials will continue their inflationary rise. With these things, the result is that the business will have lower production volume as will the industry and impact their absorption and then that price increases will not be executed as fast as the cost increases in the third quarter. And with those things, it depends on how you make the assumptions on those pieces, and you can make dramatic assumptions different on each one of those looking forward than we did. So if you believe that oils are at a high and it's going to drop to 100 you'd get a difference answer. If you believe that's going to go $160, you'd get a dramatically different answer on both the cost side and on the margin side as we go through. So our assumptions are it will be more or the same in the last half of the year.

Your next question comes from the line of Laura Champine with Morgan Keegan. Laura Champine - Morgan, Keegan & Company, Inc.: Could you comment on the year-over-year change in carpet yardage? Because of that segment down 13% in the face of multiple price increases, I am guessing the yardage is really getting hammered. Is that a good assumption?

The volume is down significantly. The industry is down about... I think it was about 14% in units with residential down more and commercial better. So there is a dramatic decline in the unit volume in the industry and our performance, I am not too proud of with that, and I'll gladly discuss that to with... Laura Champine - Morgan, Keegan & Company, Inc.: Right, I mean that leads on to the follow on which is that, it seems that you may be losing some share and I am curious what might drive that.

If you look at the overall business, the Dal-Tile and Unilin, we believe are growing share, and the Mohawk segment has not performed as well. Just to remind you we have different product categories under the Mohawk segments, so it's not all one thing. We have rug and commercial products that are doing better than the residential. We have hard surface and padding that have done worse. We've also discontinued the flat woven business that was about $40 million last year, also in the piece. And as we went through into the cycle we started making significant adjustments to our strategy, to address what we believed to be product and demand changes that were going to happen. And we aggressively made changes in various parts of the business, which have impacted our performance over the short term, but we think will position us better for the future. In broad categories, we have realigned our sales strategy to create a better focus on individual channels and remove redundancy we have across the business. We increased the specialization, by customer channel. We narrowed the various brands that we used and some more narrow brand focuses and we've taken out overlap between the different brands, while at the same time we've increased the sales force segmentation. The second major piece is we've repositioned and simplified the product line. In doing this, we dropped a significant number of SKUs. We have consolidated the SKUs within it and then to align with the sales strategy, we have reduced redundancy between the different brands and sales forces. Behind the things, we simplified and engineered, re-engineered the various components that go into them, to make them more effective. And then we have expanded what we believe to be the higher growth product areas, which would be polyester, carpet tile, multi-family and higher end stylized products or reducing others such as nylon staple and other categories that we believe are reducing. And finally, we've tried to right size the cost structure of the business. We aggressively went after headcount in all areas of administration, sales, management. We have increased the discipline in our spending of marketing monies and we have lowered the direct labor as well as manufacturing costs to go along with it in different pieces to try to offset the falling volume and all these things. We put up a lot of aggressive changes in place in the most difficult environment history. We believe that the right actions for the business and the combination of executing those things have negatively affected the business to short term. But we think long term they're going to position us for a better business as well as more profitability as we go forward. Laura Champine - Morgan, Keegan & Company, Inc.: Great, thank you.

Your next question comes from the line of Ivy Zelman with Zelman & Associates. Ivy Zelman - Zelman & Associates: And with the price increases that you are planning for the back half of the year, it's a necessity given the cost increases. The only issue though is, obviously that can negatively impact volume further, and looking at your utilization rates right now. Is it not a possibility that you'll see volumes fall off further as the expense as a big ticket item to put a New Florida home and something that could be postponable. And that right now consumers are pretty tapped out and discretionary spending seems to be now at the top their list. So is it possible, you will lose share and you will see more volume decline at the expense of getting those price increases and what do you do if that starts to happen?

The price increases that we are putting through, we believe the entire industry is putting through, everyone's amount increases. From the feedback we're getting from the marketplace, it sounds like that we're all in similar position... the marketplace has moved to a relatively similar position. With the rapid increase in oil based materials, anything related to oil is likely to go up. We believe, it will about a 10% increase with the last two increases going into the marketplace. The consumer demand is under great pressure as we know, but we think that the entire category is going to have to move up. Ivy Zelman - Zelman & Associates: No, Jeff, I appreciate that and I think obviously there is little you can do about that. I am not referring that you will lose share versus your competition. I am sorry if I may have sounded. What I am saying is, is it not a risk right now that the consumer is already feeling the tremendous stress of the weak economy? And being very levered that you will see a further decline in volume and part of the business at least the way I understand carpet is that significant utilization rates that keep margins at a high enough level, you could see yourself having shut down facilities. And you are adding the three new surface centers in West. And you are adding capacity as opposed to shutting down. Would you anticipate that there might be a need to shut down capacity given volumes might decline and a more recessionary environment for the consumer overall?

We constantly review the capacities and they are different in all parts of the business and each of the segment have difference thesis. For the most part, the only capacity that we are adding is in the laminate business, which we put in place a year and half ago or so. It's coming on stream. The other items we are spending money are all cost based, quality based, innovation based and so we are not adding capacity. Over the past year or so, we have taken out high cost equipment in different places. We have closed some ceramic plants. We have closed some yarn plants. We have taken out some high cost extrusion capacity. We have reduced the distribution assets in the marketplace. The other assets we have cut back on shifts and running them less. We constantly review whether we should take them out permanently or mark fall them [ph]. If you look at the carpet side, I would guess that it's probably running in the 65% to 70% of capacity with the decreases. The ceramic side is running higher because the decrease in volume has not been as much. And at the same time, we have been able to bring in outside volume that was sourced from other people. So, I think that we are doing the right things for the business whether we shut down assets, probably, constantly assess that. And we determine it's the right thing to do. We take those actions. Ivy Zelman - Zelman & Associates: Great.Well thank you very much.

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

Good morning. Two questions for you. First of all, Dal-Tile, how do you think about with slowing commercial, how the margins behave from here is the 2Q margin level or the 2Q margin degradation. What we should expect going forward? Or how should we be thinking about how the margins are going to line up in that segment as we move forward?

As I said in the overview, now the biggest things affecting them are, the rise in gas prices and the transportation costs are impacting the cost side of the business. The natural gas prices, I am not going to give exactly right, the first of the year they were probably around $7 a unit, and they are almost double, I think about $13 of the most recent prices. The transportation costs with gasoline and oil continue to go up. We continue to look for ways to reduce both of those pieces. We are considering a price increase, if the market will sustain it. We are looking at that at this point. It hasn't been determined whether to do it or not. What... we are doing things to try to increase our volume with different channels of business. We are still running at fairly high capacity levels in the ceramic business. So it's more of cost driven piece than a absorption driven piece at this point. And we continue to try to manage the costs. We have reduced the SG&A costs in the business and marketing costs and we continue to do those. But the rise in the other two, are offsetting the achievements we are making in the other.

Does... the top line sounds like it's expected to ease from the first half levels as the commercial demand slows. Does this back present some rest to the utilization rates in the business?

That is, which is one of the reasons, we have reduced the margins of the whole business that we... the anticipation of the piece. It's been there also.

Can you just remind us how the influence of FIFO accounting is having on margins in this type of an environment?

Under FIFO when you get your cost in, they will amortize into the P&L over a period of time depending on inventory turns in the various divisions. And those are price increases and the time that it takes to fully implement them always lag the cost increases. So there is always going to be a lag there.

With the FIFO influence in this type of environment means that the cost pressure in 3Q would exceed what you in saw 2Q based on sort of how that works, is that the right way to think about that?

Nowthat's all built into our estimate right now. I mean we are going to have timing issues with getting past increases in ahead of cost increases, just like we had in past quarters.

And then lastly in the carpet business where the material cost seems most severe. Can you just talk about what you're seeing in terms of trading down, in terms of mix from consumer? And is that happening to accelerate no different and what influence does that have on the recoverability of the input cost pressure?

As you would suspect, the middle part of the market is most affected, the higher end affected less than that. The lower end does not replace the trade down too, you have the middle parts as most affected as you're going through. The customers are trading down in quality with it. And with that, we're trying to make sure that we have the right products in the right places at the right prices to satisfy the market as it goes.

Does it offset, I mean is that an offset to price or is that able to be managed around somehow?

It's impacting margins.

It's impacting margins.

Okay.Very good, thank you.

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

Good morning. Several things, I guess it's irrelevant, but I assumed there would be a huge LIFO reserve if we are still on LIFO, I was curious by... do you have any feel for that number would be, number one? Number two. Do you have any sense of where you would hope inventories would be by the say at the end of the year either on inventory turn basis or a dollar amount? And then lastly on CapEx. I guess your guidance implies you're going to spend more in CapEx in the second half than the first half. And yet, clearly business has deteriorated. And I am curious as to whether you really intend to do that or that's a fairly conservative budget. Thank you.

Lot of questions there John, on LIFO, the answer is no. I don't know what the answer would be, what the reserve would be, if we were on LIFO now. But we do not follow that LIFO. And then your second of question was where inventories are going to be at the end of the year. We're still working to keep turns in line with where they are right now. But as you can imagine in a declining environment, like we're in right now it's very difficult to keep our production and inventories in line with where the declines are. And in addition to that we are going to be faced with, as Jeff had mentioned, continuing raw material inflation, and we will probably be looking at opportunities to buy ahead of cost increases to take advantage of that. So all those will impact our inventories in the second half.

Thanks.

Capitalexpenditures what you see is some of the things we've already committed to aren't fully paid for, which is why the second half looks like it will be more than the other, as they're still coming through. And the commitment some of them were made last year and... all the way through or even more than that and those things are coming through as we got through. Most of the capital expenditures are really focused on reducing costs, and in some cases, there are some innovative products in various areas that we're investing in that we think will help us a year or two out, as we go through. There's also investments going on reducing energy usage. There are investments going on to cut costs across the various pieces. In some cases, we had postponed some of them from prior years, as we were focused on reducing leverage in the past couple of years. We postponed some things that we had wanted to do, to position us well on our cost side and as the leverages come down, those things are being spent and they are the right thing to do for the cost of the business.

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

I was... Jeff, I wondered if you give us some idea how you think about cash usage moving forward and maybe walk us through the decision to retire debt this quarter and how you think about share repurchases in that as you move forward?

Just at the point the debt, is that we have x amount of short-term debt that we can raise and lower, so it's not a permanent. It didn't change anything permanently. So basically it was paying off short-term debt. As always we have the three pieces which is the internal investment, which this year we are investing anything that is going to cut our costs. The major focus on investments internally are cutting costs and long-term things that are going to help us improve our product innovation. And so those were most of the investments and they're going. On the other two is acquisitions and stock buyback. We continue to look at acquisitions as well as stock buyback. The question at this moment is that given the credit environment that we are all in, is the availability of credit to cost of credit, and how it impacts our flexibility. And so we are probably more conservative than normal. We still have two things. We still have acquisitions that we are looking at as well as we are considering stock buybacks, and release those things open to... to move different ways. At the same time, again, you have to keep into consideration the credit environment that we are all in.

Thanks, great answer. And then I guess the second thing I want to talk about was, Jeff, you mentioned, one of the previous callers asked about thinking about raw material costs and how you kind of project them forward and talk about your thoughts that energy and oil prices would continue to rise. My question is... if oil prices, energy prices went other direction, and then started to decline, how long would it take you guys to realize that benefit and how much of the price increases that you put through so far, also higher raw material costs, do you think you'd have to get back?

I mean... some of it would be felt immediately on... a lot of our raw materials and energy change with the rising costs. They are formula based, based on different pieces. So as those things changed they would almost immediately be impacted, depending upon which ones, gas and energy, you feel those as they change. The oil prices do our materials, there is a lag in those of different amounts and as they show up but they are getting closer and closer together as our suppliers figure out how to pass them through faster. But I mean the impact would be significant and would be happened in a reasonably short period of time. The industry use of those would... how much of it we could hold on to, would depend on the industry's reaction to those, and whether they try to hold on to them or try to use them to increase share, our hope would be that given the pressure on the industry's volume that we would hold on to some portion of those. Historically as prices have fallen, the industry had given them back over time, and the highest margins the industry typically has is in falling material environments. The last one I think would have been around 2001, would be typical.

Great. And then if I could maybe just sneak one more. And I know you mentioned before the margins on the higher end products in carpet and tiles versus lower end, there was... there were lower margin in the lower end. Can you help us quantify what that spread might be, since there is more demand seemingly trading down now?

There are different products and different ones, and the different product categories are different. In ceramic, there tends to be more margin increases, the prices... as the price points go up. Carpet tends to have more raw material increases as the prices go up. So as you look up and down and expect from those two aren't the same. And then even within the different price points, it depends on, whether you trade from stylized or differentiated products to more commodity products and how well that mix works through gives you different answers. Well there are products... from one extreme to the other it could be 20% - 25% difference in the margins, depending upon a differentiated high end product and a commodity low end would, everywhere and between. And at the same time the volumes are different to go along with them.

Your next question comes from the line of Keith Hughes with SunTrust Bank.

Thank you. Most of my questions have been answered. But Frank, sometime ago you transferred some revenues of reporting from the Mohawk segment, I believe, to the Dal-Tile segment. Have we now anniversaried that?

I believe we are still being slightly impacted by that Keith. Let me check on that, if you want me call me back.

I may call you back gentlemen. That's all I have. Thank you.

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

Hi good morning. I wanted just to follow up on the comments about Unilin. You talked about the sales decline in Europe, and I don't remember you citing that before, I imagine [ph] pricings... actually pricings going down but I mean is that... I guess I mean the units are going down. Can you just talk about that and when that occurred, when that started to occur?

The European market, I believe we started talking about it slowing down end of the last year. I believe it was in the fourth quarter. Is it? And you have to separate out the different market... the different geographic markets as well as different product categories within the market. Now if you look last year, the last few years, again, Unilin has had extraordinary results. And last year was an all-time high in what was going on. What I said was that these really high results are really not sustainable over the long term unless everything keep... unless everything continues hitting perfectly which is unusual. If you look at the segment this year.... this past quarter with what's going on, if you extract the Columbia losses, the margins in the Unilin segment were about 17.5% and the difference this year is both the U.S. and the European markets are both slowing. And some products are moving towards cyclical low points. And we have inflation based on the oil based materials and energy we use. I'm trying to give you a little more color, if you look at what we call the laminate product grouping, it's made of a European flooring business. And the European flooring piece is doing better we think... it's doing better than the marketplace because of our premium product positioning. And it's not impacted as much as the commodity areas. I mean, in addition, in Europe, we have an external MDF core sales which we sell into the marketplaces and those products have been falling both in sales and pricing, and we believe, those will continue to be compressed for a while. In the U.S. market, we continue to see slowing as the entire industry does. It's been impacted by the same increasing cost and then in the quarter, we've also has startup costs relating to the new equipment that's coming on. We have announced a 5% to 6% price increase in the flooring piece. And then the other part of the business, the IP revenue, which tends to trend with the industry volume, which is going down both in Europe as well as the U.S. The other products in Europe are made up of roofing and other pieces. The roofing is basically maintaining its performance level and while the other products, which we sell into the construction cabinet furniture markets, they are all down. And again in this piece the pricings is declining as well from the cyclical highs last year. So all those things are impacting the margins. [Technical Difficulty]

Hello.

Are we still on?

Hello, hello.

Okay. Even with that, I think that we've had good results with 70.5% margins I think in this environment are excellent. And again as you look forward to the next period, remember that Europe has vacations schedules and reduced business in margins. If you look back over the last two years we've owned the business somewhere between 2% and 3% margin decline between the second and third quarters we have. And this year, we are expecting with the lower volumes to have more production reduction on our production schedules. So, I think that sort of gives you a broad overview of the whole business and where the pieces are. And we think that we're outperforming the marketplace and we are well positioned, it's a tough environment.

That was a great summary. Just so are units negative in Western Europe and then I guess you suggested that they were positive in Eastern Europe, is that...

Well you got a lot of different products in a lot...

In laminate.

Laminate, the Western Europe, like UK and Spain are down. I don't know if you keep up with the building in Spain is a disaster. U.K has slowed down significantly. So you got go country by country, but on average the Western Europe has slowed and the volume has declined. And then you have the pressure on these other sales products within the market and then Eastern Europe and Russia are still growing.

Okay. One more question just on the IP. Is the IP kind of fairly distributed between Western and Eastern I mean --

Most of it... I mean it relates to where the production is, and the biggest production is in Europe, in Western Europe and U.S. would be where the majority of it is. And then there is licenses all over the world from China to everywhere else you can name.

All right. Thank you very much.

You are welcome.

Thank you. I will now turn the conference back over to Mr. Lorberbaum for closing comments.

Theenvironment continues to be very difficult. We are making the adjustments to our strategy based on what it is. We continue to focus on costs, in the environment we are and putting ourselves in a good position as we come out of the cycle. These things always look disastrous in the middle of the down part of the cycle which is where we believe we are. And we think we are positioning the business for the long term. We appreciate your interest in Mohawk and have a nice day.

Thank you. This concludes today's conference. You may now disconnect.