Feb 24, 2009
Executives
Jeff Lorberbaum – Chairman and CEO Frank Boykin – CFO
Analysts
Jeff Saut – Raymond James Dan Oppenheim – Credit Suisse David Goldberg – UBS David MacGregor – Longbow Research Eric Bosshard – Cleveland Research Steven East – Pali Capital Ray [ph] – J.P. Morgan Dan O’Neill – Prospector Partners Ivy Zelman – Zelman & Associates Carl Reichardt – Wachovia John Baugh – Stifel Nicolaus Keith Hughes – SunTrust Robinson Humphrey Laura Champine – Cowen & Company
Operator
Good morning. My name is Lori and I would be you conference operator.
At this time, I would like to welcome everyone to the Mohawk Industries Fourth Quarter 2008 Earnings Conference Call. All lines have been placed on mute to prevent any background noise.
After the speakers’ remarks, there will be a question-and-answer session. (Operator instructions) As a reminder, ladies and gentlemen, this conference is being recorded today, Tuesday, February 4th, 2009.
I would now like to introduce Jeff Lorberbaum, Chairman and CEO. Please go ahead, sir.
Jeff Lorberbaum
Good morning. Thank you for joining us to review our fourth quarter 2008 results.
With me on the call is Frank Boykin, our CFO, who will review our Safe Harbor Statement and later the financial results.
Frank Boykin
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 risk and uncertainties including, but not limited to, those set forth in our press release and our periodic filings with the Securities and Exchange Commission. This call may include discussion of non-GAAP numbers.
You can refer to our press release at the Investor Information section of our website for reconciliation of any non-GAAP to GAAP amounts.
Jeff Lorberbaum
Thank you Frank. Our fourth quarter sales were $1.485 billion, a decrease of 18% from 2007.
The Company generated operating cash flow of $199 million, and reduced our debt by $100 million. We had a $124 million of non-cash impairment charges and $30 million of restructuring charges during the quarter.
The restructuring charge previously announced was for the closing of manufacturing and distribution facilities to right size the business. Excluding these charges, the operating income was $61 million for the quarter.
We reported a net loss of $128 million or $1.87 per share including these charges. For the year 2008, our Company’s sales were $6.8 billion, representing a 10% decline with operating margin of about 7%, excluding these charges.
We generated cash flow from operations during the year of $570 million and reduced debt by $333 million. We also invested $218 million in capital expenditures, which focused on cost improvement and product innovation.
We are in an unprecedented time were the US and world economies under great stress. Our businesses are suffering from the same issues as the entire economy, including increasing unemployment, falling consumer confidence, limited credit availability, declining business investment.
In addition, the housing contraction had a significant impact on the purchase of flooring for residential channels. The European economy has also rapidly declined over the last few months.
In this environment, we are focused on cash flow and the balance sheet. Our balance sheet remains strong with over $850 million of credit availability.
All of our business units have as a priority to maximize cash by reducing costs, improving working capital, limiting capital expenditures, and focusing on actions which positively impacts sales and margins. In 2009, we will have D&A of about $300 million and capital expenditures are planned at a $125 million, but we are only spending as required.
All our segments have taken aggressive steps and on capital structure and cash flow will allow us to manage through this downturn.
Frank Boykin
Thank you, Jeff. Net sales for the quarter as Jeff had mentioned was at $1.5 billion or 18% down from a year ago.
All of our segments were down with business both in the US and Europe and in residential and commercial categories down. Sales on a constant foreign exchange basis were down 17% year over year.
Our gross profit dollars were $356 million or 24% of sales that compares to a year ago gross margin of 27% of sales. The drop is due to volume declines, cost increases, and restructuring charges.
Our SG&A was $325 million or 22% of sales. SG&A was up slightly due to restructuring, would be flat without the restructuring charges.
Impairment charge of $124 million was due to the continuing stock price decline that we saw in the fourth quarter, as well as continuing business environment declines. This $124 million impairment charge included $65 million that was related to the finalization of our Q3 charge with the remaining $59 million related to Q4.
Our operating loss including these charges was $93 million. Our operating income, excluding the charges came in at $61 million or 4% of net sales, which is in line with our expectations.
The restructuring charges of $30 million in total included $17 million in cost of goods sold and $13 million in SG&A. Interest expense at $30 million was down from last year due to lower debt levels and lower interest rate's.
Other expense of $18 million was up due to unfavorable foreign exchange as the peso and the Canadian dollar impacted us unfavorably for the quarter. Our income tax benefit, as reported was $14 million and that reflects a tax rate benefit of 10%.
Our year-to-date rate excluding charges was 23% to 24% and we expect our tax rate going into 2009 to be in the 20% to 22% rate. However, the 2009 rate could be impacted differently based on earnings and mix of business in 2009.
Our loss per share was $1.87 per share for the quarter. If you jump to the segments, the Mohawk segment sales at $801 million was 17% down from last year.
This was due to a slow residential remodeling and new residential constructing business, as well as our commercial business also beginning to slow down more. Operating income in the Mohawk segment included $23 million for impairment charge and an additional $23 million for restructuring charges.
Operating income, excluding charges was about flat at a loss of $3 million. Dal-Tile sales at $413 million were down 12% from last year, as they were impacted more this quarter from the commercial decline.
Operating income in Dal-Tile included $5 million in restructuring and no impairment charge. Operating income excluding charges for Dal-Tile came in at $47 million or 11% of net sales, which was a reasonably good result considering the economy that we are in.
The Unilin segment sales came in at $292 million, down 26% from last year. Foreign exchange impacted us negativity by 6%, so on a constant exchange rate basis sales were down 20% year over year.
Operating income in Unilin included $101 million in impairment charge and $2 million of restructuring charge. Operating income excluding charges was $21 million or 7% of sales.
FX, foreign exchange negatively impacted our operating income by $2 million, and it also included $7 million of operating loss for our wood business, as the wood industry has been significantly impacted by the slowdown in housing. Corporate category included an operating loss $4 million for the quarter.
Turning to the balance sheet, receivables were $696 million. Our day sales outstanding were 47 days, up about two days from last year.
We’ve seen some deterioration in aging, but overall the receivables are still in very good shape, and as we mentioned in earlier calls, we have a large number of customers, over 30,000 customers, with no one customer constituting more than 5% our total receivables. We do would expect an increase in bad debt expense this year.
Historically, it’s run about 20 basis points to 25 basis points as compared to sales, it could go up as high as 40 basis points this year. Inventories were $1.168 billion.
That represents inventory turns off 3.8 times in the quarter and all of our businesses are continuing to work to drive inventory levels down in this very difficult environment. Fixed assets ended the quarter to $1.925 billion.
Capital expenditures for the quarter was $63 million, that compares to depreciation and amortization of $69 million. We are currently forecasting CapEx for 2009 in $125 million, however this could change and we will continue to monitor it and re-evaluate it as the circumstances change.
Depreciation and amortization for this year 2009 is expected to be $300 million. Finally on the balance sheet, long-term debt ended up at $1.954 billion.
We paid $100 million of long-term debt during the quarter, and I want to take just a moment to discuss the conditions of our capital structure and our liquidity. We have a bank facility with availability of approximately $830 million that expires in the fourth quarter of 2010.
We have a receivable securitization facility with availability of $250 million that expires in the third quarter of this year. At the end of this year, we had drawn down against both of those facilities a $100 million, and in addition, we had another $115 million committed against letters of credit, so we had $215 million committed or drawn down against those two facilities.
The only covenant we have is a debt-to-capital covenant with a 60% limit. At the end of December, we were at 42% based on the covenant definitions.
We don't believe we have any risk of violating this covenant. Our next term loan payment is due in the first quarter of 2011, and it is a $500 million payment.
We don't believe we have any immediate needs to change our capital structure right now, but we continue to have discussions with banks to make sure we fully understand all our options and alternatives. We do have several alternatives, even in this environment, if we need in the bank market.
In addition, the bond market has begun to improve over the last four to six weeks with several recent deals in our category. The rating agencies have us – with Moody's has us on a review per down grade and Standard and Poor's has us with a negative outlook with a BBB minus rating.
If Moody's does downgrade us it would result in an additional $4 million of interest due to the step-up provisions we have in our loan agreements. We strongly believe that we have sufficient cash flow and credit availability for this cycle.
Between depreciation and amortization of $300 million and the CapEx that we have estimated of a $125 million, further reductions in working capital of this year and future earnings we should generate sufficient cash. And I’ll remind everybody that we have generated over $350 million of free cash flow this year and we paid down debt of over $330 million.
Jeff?
Jeff Lorberbaum
Thank you Frank. Our business tends to leave the economy in the down turns, and likewise into recovery periods.
Since January 2008, we have taken many actions, including produced full-time staffing of our business by almost 6,000, shutdown nine manufacturing sites and a number of production lines. We cut warehousing by 1.25 million square feet.
We have reduced inventory receivables. We implemented multiple price increases, and we have improved business processes throughout the Company.
We continue to aggressively realign the structure of our organization to address changing business conditions during the fourth quarter and going forward. High-cost materials negatively impacted the fourth quarter, and will have a significant impact on the first quarter of this year.
In the first quarter, we are further reducing inventory and evaluating staffing and asset requirements appropriate for the environment. The Mohawk segment sales declined 17% in the quarter, with both the residential and commercial businesses down.
Customer traffic and flooring retail stores dropped significantly in the fourth quarter. In addition, consumers continue to trade down to lower-cost products.
The commercial business began to slow more in the quarter as the category continued its cyclical declines. Price increases announced in the third quarter were implemented.
As we stated last quarter, raw material costs escalated higher than anticipated as oil peaked and remained at extraordinary high levels into the first part of the fourth quarter. As demand deteriorates in the fourth quarter, we cut productions significantly to reduce inventory and purchase limited raw materials as cost declined.
These actions lowered our inventory but created more unabsorbed overhead in the period and increased the cost of FIFO inventory flowing into the first quarter. These decisions will benefit us long-term but will negatively impact our first-quarter earnings.
We closed two plants and multiple distribution points and implemented many initiatives reducing infrastructure, increasing productivity and manufacturing logistics. The business has continued to adjust employment levels to current demands with approximate 20% reduction of personnel in 2008, as well as reduce workweek levels.
Our polyester carpet products are improving their position in the marketplace as consumers perform more value-oriented options. We have broadened our Sorona product line made from corn to provide greater styling options.
We have high-style commercial products that have been introduced at lower price points with new nylon fiber systems. Over new Internet system, we call Dragonfly is assisting commercial customers as they design present concepts for new projects.
We completed the launch of our new wood product line and are broadening our customer base for those products. Our Dal-Tile sales were down 12% in the quarter compared to last year with a continued decline in the residential and a slowing commercial business also.
Margins were impacted by declining product mix, and lower production levels creating negative observations in the fourth quarter. The business improved its position in the declining environment as it leverages its strong distribution system and broad product offering.
The business is focused on cost reductions including sales manufacturing and distribution staffing, lower alternative materials, improving transportation utilization, and modes. We also improved our American OEM distribution in two underperforming regions.
We shut down high-cost production lines that move products to more efficient plants. We reduced personnel in the segment by about 800 since the beginning of 2008.
Inventory levels were balanced with declining sales and should come down as we go forward. Warehousing at the plant has been added to shift product more directly and reduce overall distributions expenses.
A new service center system has been tested and is being implemented to improve productivity inventory turns and service levels. About 10% of our service centers were remodeled or relocated in 2008, and we are presently evaluating the consolidation of some low volume service centers.
We are increasing our penetration of the Mexican market with a broader product offering and increased distribution. Dal-Tile is also offering a direct collection program that targets large customers that import products with volume shipments from our manufacturing facilities, which should improve the inventory turns of our customers.
New commercial tile is being introduced that utilizes patent pending technology that reduces bacteria growth by 99%. The team is also pursuing many opportunities to improve stone sales, which include making projects easier to visualize, providing exterior (inaudible) and easier to install stone veneers.
The Unilin segment sales during the quarter are down 26% as reported or 20% on a constant exchange rate basis. All products in both Europe and the US have declined from the prior years as the contraction in the economy became more acute.
Sales were also influenced by our customers producing inventory levels to align with their lower demand levels. The European market has moved into a severe contraction and will take time before we anticipate a recovery.
The Spain and UK markets were impacted the most as home sales slowed. Eastern Europe and Russia performed better, but we accept a slowdown to affect these markets going forward.
With a significant pull back in spending on residential projects, laminate volumes fell both in the US and Europe. Production schedules have been lowered and order equipments in the US have been shutdown.
Cost reductions have been implemented including staff reductions of more than 500 since the beginning of 2008. Additional production shut – temporary production shutdowns, product and process reengineering, and freight optimization.
We have recently launched new innovative high-end products, which were wide planks with both high-gloss enhanced scraped surfaces. In Europe we introduced a two meter length product creating a new product category for this quick step laminate line.
We have added new licenses for our patent in the period, but falling industrial volumes are reducing reoccurring royalty payments. Our roofing systems sales began to decline in the period.
We are just starting to market a new line of Polyurethane insulation board to the same customer base, which should be a nice niche market. Continuing the prior period trend, our European board sales remain under both volume and pricing pressure.
The board selling prizes have contracted severely as much of the cost are fixed and producers are trying to maintaining volume forcing high cost industry capacity to be taken out. We are also introducing new products such as finer fiber boards and focusing on thinner board with unique end users.
Our wood strategy is well underway in a very difficult environment. We completed the US product introduction and have a complete offering from value to premium.
We have launched new wood collections under our Mohawk brand and are aligning distribution for our Columbia and Century brands. New automation has been installed and is operating with lower labor an improving quantity.
We are launching a new quick step branded wood collection in Europe with a proprietary locking system. We have improved the cost, quality, and, product offering of our wood, but the declining volume has offset our cost improvements.
We will continue to have an operating loss of the $4 million to $5 million in the first quarter. The current environment is expected to remain challenging for the near-term.
We believe sales volume will continue to decline in the first quarter. The effect of lower carpet materials will not be realized until the second quarter.
Carpet pricing increases did not cover the peak material increases, which have remained high into the fourth quarter. During the fourth quarter sales decline has significantly reduced inventory by curtailing production and material purchases leaving a higher portion of higher cost inventory at the end.
In the first-quarter the Mohawk segment is forecasted to have an operating loss resulting from the $60 million flow through of peak FIFO cost. Both our Dal-Tile and Unilin segments will continue to be impacted by the recession and lower consumer spending resulting in lower production volumes and declining product mix.
Based on these factors, our earnings per share guidance for the first quarter is a loss of $0.80 to $0.89 per share. We will remain focused on managing the balance sheet and maximizing our cash generation across our businesses.
We will continue to reduce infrastructure, capital expenditures, working capital, and controllable costs. In the second quarter, margins will be positively impacted after the peak inventory cost flow through the first quarter, and we have seen seasonal improvement in volume.
Our industry has excellent long-term potential with demographics, which ultimately lead to continued growth when the economy recovery begins. As the largest floorcovering manufacturing company in the world, we have an industry-leading position in each of our major floorcovering product categories.
We remain positive about our long-term prospects for our Company. With that we will be glad to take questions.
Operator
(Operator instructions) your first question comes from the line of Sam Darkatsh of Raymond James.
Jeff Saut – Raymond James
This is actually Jeff calling in for Sam. Good morning, Jeff, good morning Frank.
Jeff Lorberbaum
Good morning
Frank Boykin
Good morning
Jeff Saut – Raymond James
My first question is in regards to the guidance, are you modeling any restructuring cost or additional asset write-downs in the guidance?
Frank Boykin
No, we are not.
Jeff Saut – Raymond James
Okay, no unusual onetime charges of any kind.
Frank Boykin
Correct
Jeff Saut – Raymond James
Okay, and then unrelated follow-up, the $60 million in FIFO cost headwinds, can you help me understand exactly how you got to the $60 million? What variance that represents?
Frank Boykin
That represents – taking through the process, we announced our last price increase back in the third quarter. Our raw material costs in the carpet segment continued to run up and didn’t peak until we got into the fourth quarter.
So, have a period of time there where raw material cost ran up higher and what we had anticipated and estimated and we developed our selling price increases. That delta between the selling price increases and the peak raw material cost run out is in essence what we have in our ending inventory that has to flush through in the first quarter and that will negatively impact our earnings.
Jeff Saut – Raymond James
With $60 million of inventory it is at the peak levels?
Frank Boykin
$60 million of peak – high cost inventory sitting in our December inventory.
Jeff Saut – Raymond James
Right. And the $60 million is the total cost of the inventory not a delta between the cost of that inventory and the cost of the normal inventories?.
Frank Boykin
It is the delta.
Jeff Saut – Raymond James
Okay. Alright, perfect thank you.
Operator
Your next question comes from the line of Dan Oppenheim of Credit Suisse.
Dan Oppenheim – Credit Suisse
Great. Thanks very much.
I was wondering if you can talk about 2009, and talk about how you are expecting the volume to be down the first quarter and how to reduce the overhead that is impacting the result. What do you think in terms of the – what are you going to be in terms of adjusting the overhead cost, how much of your business is sort in fixed or in variable or – what adjustments should we expect as the year goes on?
Jeff Lorberbaum
We will start-off with what we have already done. We have already cut 5,800 people.
We have reduced the different pieces as we go through. We have gone – let me get through the first quarter to the fourth.
From the first quarter you then have the raw material piece that you talked about the $60 million flowing in the first quarter, we have the segment, will be positively impacted as we go through the future quarters as those peak costs have flown through where they are. We also have the pressure on the volume in the first quarter, which should change as you go through the year.
In the first quarter, what we have is a seasonal little period that historically we have built inventories in the first quarter to move through the other quarters. In the first quarter of this year we are going to probably reduce production rates somewhere in the range of 10% to 20% based on different categories in order to reduce inventories, as well as they both peak and so as we move out of that we will have the seasonal upturn in the production levels, which will offset those.
We continue to evaluate the difference of volumes, as well as the different capacities and thesis to keep them in control going forward, we have multiple plans on the table and depending upon how things evolve, we will take different actions as we go forward.
Frank Boykin
And Dan on your question regarding fixed cost. Let me come back to you on that we are still – this ratio is between fixed and variable of still moving around as we adjust capacities now, so let me come back to after the call on that.
Dan Oppenheim – Credit Suisse
Sure no problem – in terms of the sales declines will abate as the year goes on, just trying to get a better sense in terms of what the expectation is in terms of what sort of snap back is embedded in your thoughts right now?
Frank Boykin
We have multiple estimates as we go forward because our visibility is very short. I mean it depends on what the consumer is doing, what the economy does, what the government does, and is there any stabilization in the piece.
But our assumptions are that you will have the 10% to 20% we reduced in the first quarter, as well as the seasonal pickup as we go into the second and third quarters.
Dan Oppenheim – Credit Suisse
Okay thanks very much.
Operator
Your next question comes from the line of David Goldberg of UBS.
David Goldberg – UBS
Thanks. Good morning – good afternoon.
First question is about kind of the competitive landscape that you are facing now, and how you are seeing your competitors react to the slowdown as price is becoming more of a levered try to drive sales? And how are you guys thinking about that in terms of your own business?
Jeff Lorberbaum
We are in a lot of different markets and products. They are all slightly different from each other.
In general, I think that there is a lot of discipline being had by most of the participants as the business is under great pressure and as the volumes declining, it’s difficult on everybody’s cost structure. So, everybody is trying to maintain as much as pricing as possible.
On the other hand, as you go into these things the things that tend to get affected most would be the commodity products in any of the different product categories around are under the most pressure. And people tend to be more aggressive in those trying to find some volume areas to run as you go through, as well as there are various promotions as people try to –.
And so all those things are happening and our normal what’s going on. In general though, there’s a lot of discipline across the different product category.
And again I guess in the extreme, in the more commoditized areas, there’s more pressure. At the same time, in our business we are going after some lower margin business that when business conditions were good, we would have left that for other people who are being more aggressive and taking on product sales in some areas that we might not have taken historically and the combination of those things.
David Goldberg – UBS
And just a quick follow up. When we look at the CapEx expectations for 2009 versus CapEx in 2008, where does the delta come from?
What kind of CapEx spending are you eliminating I guess year-over-year when you look forward?
Jeff Lorberbaum
We were putting in investment in order to update areas that we had. We had different areas.
Remember a lot of the CapEx takes a year to a year and a half to put in. So, you are going back now to the plans that were put-in in 2006, coming into 2007, we expanded some of our extrusion and manufacturing in order to give us more flexible capacity to meet the changing needs of the marketplace.
We’ve put in some new –
Frank Boykin
Laminate.
Jeff Lorberbaum
– laminate capacity in the US as we had thought that the marketplace was going grow more than it has. On the other hand we shifted capacity from Europe to here and given the euro exchange that has had a positive effect on the costs.
And it – Frank do you remember the other big projects on top of your head? I get them all confused when I look at years.
I think those are the big ones. So, I mean there are more capacity pieces.
There were also other things put in to improve quality and productivity and we are being much more – we have higher threshold before we do them now. Presently our capital expenditures for 2009 either has got to give an immediate payback very high, it has to give some unique product proposition or basically we are postponing.
David Goldberg – UBS
I guess the question would be – it’s very hard to see right now what the kind of market normalizing in the future. But does postponing the CapEx spending on these projects have a longer-term impact when things do normalize for you?
Jeff Lorberbaum
Given the depth of the decline in the marketplace, we don’t expect it to snap back overnight. So, we think there’s plenty of capacity to support those things.
Things like we were considering at other point is may be some Greenfield or some acquisitions in other parts of the world, some of the parts don’t look so good right now. So, I’m not sure that that’s a negative at this minute, as if.
Some of the capacity we were going to put in ceramic, you don’t need at this moment and time, as if. So, I think by postponing those decisions it’s not going to hurt us.
David Goldberg – UBS
Great. Thank you.
Operator
Your next question comes from the line of David MacGregor of Longbow Research.
David MacGregor – Longbow Research
Yes, sir. Good morning everyone.
(inaudible) traveling today. Jeff, with respect to the production curtailments, is it possible to isolate this impact on fourth quarter and your first quarter ’09 now?
Jeff?
Jeff Lorberbaum
The – I think the best I can do for you is sort of line up the volume pieces and just sort of walk you through a high level view of it. If you go back historically, Mohawk ran the various plants probably on average some where in the high 80s, 90% of capacity as we went through before we hit the cyclical decline.
Some areas were more, some were less. The ones that might have been more would be the high capital intent areas, which would run higher some approaching close to 100% and those could have been things like our extrusion capacities, our ceramic production, even our board plants.
And then what will happen is, as we would go into the year, we would actually run those different facilities during the low periods of the year to support the higher periods of the year. In addition, the flooring industry as we look at it today and we are guessing it some of it – we are guessing from the peak periods, the present unit production and run rates could be 30%, 35%.
And those run rates will be more or less from different products, we think laminates would be less, and may be wood might be more and different pieces falling in between. It’s going a significant downturn in this total volume.
And again as we look forward to the first quarter instead of building inventory, we said that we are actually going to cut the production somewhere between 10% and 20% from where we were in the fourth quarter. Going into the first quarter, going through and that we are doing that in order to reduce the inventories more in line with the volume that we think necessary to support the business and as well as the inventory levels.
Does that give you some sort of feel for it?
David MacGregor – Longbow Research
Yes. That’s helpful.
And may be Frank I can follow up with you after the call on that, for little more detail. And then the other thing I was just hoping you can give us a sense of is with respect to your first quarter guidance, what are using in terms of top line performance by segment.
Is it possible to give us some quant on that?
Jeff Lorberbaum
We have not historically broken out each segment. Typically we have missed the differences, so just hope the average of different pieces come up close to where we are guiding you, especially in this environment where there’s very little visibility.
David MacGregor – Longbow Research
Okay. And then just, can you give us what your percentage commercial is by end market or your commercial end market is by segment?
What’s your percentage commercial in each of the three segments?
Jeff Lorberbaum
I’ll give you a rough guess, if don’t hold me to tell them exactly. I think that the ceramic business is probably somewhere around 40%.
It increased as the volume in the residentials declined as a percent of our business. We think we are slightly higher than the marketplace.
I think we are probably similar to the Mohawk segment is around 25% in that range. And then the Unilin business has basically none.
David MacGregor – Longbow Research
Okay. Thanks very much guys.
Jeff Lorberbaum
Okay.
Operator
Your next question comes from the line of Eric Bosshard of Cleveland Research.
Eric Bosshard – Cleveland Research
Good morning.
Jeff Lorberbaum
Good morning.
Frank Boykin
Good morning.
Eric Bosshard – Cleveland Research
First of all, in terms of the 2009 free cash flow with the reduction of CapEx of $100 million, should that allow free cash to be similar in ’09 to what it was in ’08?
Frank Boykin
I think if you just kind of think through the different components of cash flow this year, depreciation and amortization like I had mentioned running at $300 million and then CapEx at $125 million or lower depending upon how the environment develops. And then further reductions in working capital, and then any future earnings that we generate this year.
Just doing the math on the CapEx and depreciation put you at kind of $175 million number. And then between working capital and everything else, you could see free cash flow getting up into the same range that we had this year.
Eric Bosshard – Cleveland Research
Great. Secondly, this $60 million, how much of that is input costs and how much of that is incremental fixed cost that was under-absorbed to do production?
Frank Boykin
The $60 million is raw materials.
Eric Bosshard – Cleveland Research
So, it’s – that’s all raw materials? And that’s – and that is in over what timeframe would that product be used?
Is that sort of three months worth, four months worth?
Frank Boykin
Our inventories turn kind of three, three and half months. So, that’s what you are looking at inventory at the end of December that is going to turn over the next cycle there.
Jeff Lorberbaum
But that’ll hit in the first quarter.
Eric Bosshard – Cleveland Research
Okay. And then in terms of tile, I guess the last question.
In terms of the tiles segment, the margins I think as you had even commented Jeff, kind of hung in there pretty well in the fourth quarter considering the sequential year-over-year slowing that we saw in growth. How do you think about the margin performance of that you know more commercial exposed segment as we look into 2009?
Jeff Lorberbaum
I mean you are going to have the commercial business is going to continue to slowdown, the question is what’s going to the residential, and we hit bottom in that. I don’t know how much further there is to go down in the residential pieces is there.
We continue to try to improve our position in the marketplace; you are going to have some cost positives of natural gas and transportation coming down. And then you have the other side which is the – again we’ve talked about several occasions with all the businesses, the product mix we continue to – the average product mix continues to move down because people are not trading up as much.
On one side for the customers’ aren’t buying the same proportions. And the second is we are taking more business in the lower value areas that has historically in good times we might not have been so aggressive in.
We have all those impacting the result.
Frank Boykin
And the margins will be under pressure in the first quarter in particular as we take volumes in.
Eric Bosshard – Cleveland Research
Okay. Thank you.
Operator
Your next question comes from the line of Steven East of Pali Capital.
Steven East – Pali Capital
Hi, good morning.
Jeff Lorberbaum
Good morning.
Frank Boykin
Good morning, Steve.
Steven East – Pali Capital
If we looked at second quarter Mohawk and Dal-Tile, particularly Mohawk as you factor out all of the impacts from the first quarter. Should we expect profitability coming through in that division in the second quarter?
I’m trying to get a feel for how big of impact these one-time items are in the first quarter?
Jeff Lorberbaum
Let me just start out. You know our visibility is limited as is yours.
So, you have a big question over what’s going to happen to the economy and the consumer, which we are going to have to guess that. The first quarter inventory is coming down, which is going to help cash, but that decrease is not going to be repeated over the second quarter.
And then you have the seasonal improvement that’s going happen with it. We have the raw material benefit of the $60 million that’s going to come through in the first quarter.
And so you have a positive $60 million in the second versus the first. We have through the business all the different cuts.
You don’t get the improvement of the cuts you make the first day you make them. So, all the different we have been making in the last few months should start benefitting ’08 – ’09 as we go through it.
You have the impact again like we talked about in the ceramic business of natural gas and transportation and distribution costs. So, I mean our expectations are that the second quarter will be significantly better than the first quarter.
Steven East – Pali Capital
Okay. And then if we look at commercial, how much are you seeing it down year over year right now, and what are the trends you all are seeing?
Jeff Lorberbaum
We are seeing – as we went through the third quarter and into the fourth quarter as the whole economy tightened up. We are seeing similar decreases in the volume of both residential and commercial.
And as you look at sequentially, I think you should see that both fell somewhere between 5% and 10% of where they were before. And so that sequential decline happened in the fourth quarter from the third quarter, and it’s anybody’s guess what is going to be next.
Steven East – Pali Capital
Okay. And thanks.
And just one last question, if you look at your overhead decline, I know you don’t have the fixed cost for SG&A and COGS for overheads, but as you look at it what type of percentage decline are you seeing in the fourth and first quarter of this year versus a year ago?
Jeff Lorberbaum
I think we have a difficult time telling the difference between the cost cutting and the low volume which is offsetting it. And so what happened is we cut the cost, so volumes decline is going up.
So, you have the fixed costs are going up, and again it’s been difficult to cut as fast as the things declined towards the last half of the year. We never believed that we go here, we probably would have been more aggressive a few months ago.
We didn’t believe the rate at which it was declining. But I can’t give an exact number on it as we see.
Steven East – Pali Capital
If we looked at it on a dollar basis, could you – are we down? Is it fast to say percentage wise or –?
Jeff Lorberbaum
Okay. Why don’t you get Frank, he is going to try to break out the fixed and variable pieces a little different.
Once you call Frank which should give you a view of which I think are using it.
Steven East – Pali Capital
Okay. I’ll do it.
Thanks a lot.
Operator
Your next question comes from the line of Michael Rehaut of J.P. Morgan.
Ray – J.P. Morgan
This is Ray [ph] for Mike. Just a couple of questions, going back to the mix shift kind of issues that you were talking about, customers’ going towards more value-oriented brands.
Sort of, if can you give us a rough idea of you know what the margin differential between value brands and your medium and then premiums brands are by segment?
Jeff Lorberbaum
And do you expect me to have a lot of information on my head?
Ray – J.P. Morgan
That’s in rough.
Jeff Lorberbaum
There is two parts. One is that the margins are different, but also the SG&A that’s associated with them also change.
As you go up the line, the SG&A changes – from one extreme we may cut them at products, you have sales people actually helping design product. They are very high SG&A on those, which would show high margins but have to net out the differences.
As you go down the thing on the other extreme, you can go to product categories that basically you have very limited sample and sales costs. And so, at the other extreme you could have SG&A costs less than half or it might be even more than that of the other extreme, and as you go down the pc [ph] end of it again by channel and by product and the of end of a different value.
I mean there’s an extreme – I mean you could have doubled the margin or you could have the same as you go up and down the stream based on products. But again the more commoditized it is, the bigger the difference is in a pc [ph].
It could be 10 points, 15 points.
Ray – J.P. Morgan
But on an operating margin basis their gross margin?
Jeff Lorberbaum
Gross margin.
Ray – J.P. Morgan
Okay. So, on an operating margin basis you are seeing that’s a little bit more narrower because the SG&A is higher or lower depending on whether it’s a premium or value round?
Jeff Lorberbaum
Correct.
Ray – J.P. Morgan
Okay. This is the follow up question.
Just going back to the raw materials, your promises were to stay where they are today. So, if you can give us a sense of what 2009 is in, also on a year-over-year basis if you could talk about some of the major inputs you guys have and how far that’s down right now?
Jeff Lorberbaum
The inputs for the most part have all gone down. The oil related ones have gone down more.
The non-oil one typically has been pressed on those two even like woodchips going into our board businesses. As the volumes declined, those have declined – so the decline going on all the different categories.
I can tell you that no estimate we’ve had in the last six months has out come anywhere close to where it is. As a general thing we believe that now according to the best guesses they probably bottomed out, and many people believe that going forward, they’ll increase from here somewhat over time, but I wouldn’t – those are what which are paid for at this minute, which is not much the estimate.
Given what we have looked at over the last six months, I mean our estimates haven’t been in the ballpark as if. But we think they are towards the low as they are now, and there will be some upward pressure on them going forward.
And there have been different amounts, some significant and some not as significant through the various categories.
Ray – J.P. Morgan
Right. Thank you.
Then lastly on the other income expense line, is that $80 million a good number to use as a run rate if Canadian dollar and the Mexican peso were to stay the same or is there a better number that we should be using?
Frank Boykin
No, they stay the same as there is no movement in exchange rate and I won’t have that loss. Okay, so, –
Ray – J.P. Morgan
On a year-over-year basis, is that –?
Frank Boykin
Yes. And that’s where it’s going to stay where it is right now and we have the loss.
Ray – J.P. Morgan
Okay. Thank you.
Operator
Your next question comes from the line of Dan O’Neill of Prospector Partners
Dan O’Neill – Prospector Partners
Hi. Your CapEx plan for 2009 of $125 million is a bit lower than what I was in thinking of terms of maintenance CapEx.
I was thinking it was more of $150 million, $160 million. Perhaps I was wrong, but is the $125 million, is that a sustainable number over the next three years?
Jeff Lorberbaum
I don’t know that further, we are – we’ve gone into this piece. I think this $125 million to $150 million is probably sustainable over long periods of time.
I think in the short-term, we might be able to push it down more than the $125 million, I don’t know as if. My group doesn’t like that, but I’m pressing them.
The question is how low we can stay at that rate. But I don’t know –
Frank Boykin
If the economy stays like it is now, you know, we’ll stay at that lower rates, run rates lot longer. Our maintenance historically is around about $100 million, just flat maintenance.
Dan O’Neill – Prospector Partners
Okay. Can you talk about your ability to pull down working capital?
How much can you pull out in the declining market?
Jeff Lorberbaum
Part of our opportunity up to this part is every time we put a plan into introduce it, the industry volume declines more. So, whatever plan we put in place doesn’t get us to where we would like to as you can tell from what we are talking about which I’m not pulling it further in the first quarter which is the worst quarter here.
Again managing the cash in the business rather than trying to maximize the profit margin, is if, which we think is the right thing to do. We believe that as business goes down, historically we used around $0.15 to $0.18 for working capital for each additional sales dollar, but the question is on the down side, can we keep – can we get to that point?
We are going to sure drop.
Frank Boykin
The – all the businesses are focused on driving down inventories, improving the process and driving down inventories. And in addition, just looking forward from where we were at the end of December, on the carpet side, we got higher price of cost inventories and that cost will go down as well.
Dan O’Neill – Prospector Partners
Could you provide a ballpark figure for working capital reduction for 2009?
Frank Boykin
Not at this point.
Jeff Lorberbaum
You have to make a decision – I mean in your old estimate decide what the volume is going to be and then take somewhere between 12% and 18% and 15%, 18%, 12%, 18% and took a number you are comfortable with.
Dan O’Neill – Prospector Partners
Fair enough. And, could you tie the decreased CapEx and decreased working capital into your ability to meet the bond maturities in 2011, 2012?
Frank Boykin
I think the way that I would look at that is like I had discussed before depreciation and CapEx that after there is about $175 million we should be able to continue to reduce working capital further from what it is right now. So, pick a number to use there $25 million, $50 million, and then in addition earnings that we generate will also obviously positively impact our cash flow.
So, our next bond payment is not due until the first quarter of 2011, $500 million. I got about $100 million of debt still on the balance sheet right now, which I should have paid by the time I get to the end of this year and have more cash on the balance sheet when I get to the beginning of 2011.
And then in addition, like I mentioned, we have access in both the banking market and in borrowing market right now to additional financing if we decide to go ahead and roll over our existing financing. So, I think between all those alternatives and options we’ve got plenty of opportunity.
Dan O’Neill – Prospector Partners
Great. Thanks a lot.
Frank Boykin
You are welcome.
Operator
Your next question comes from the line of Ivy Zelman of Zelman & Associates.
Ivy Zelman – Zelman & Associates
Good morning, Jeff and Frank. First just a housekeeping question on your – you mentioned that the days outstanding on receivables, what was the bad debt expense actual dollars for the quarter, Frank?
Frank Boykin
Not sure I’ve got that right here in front of me, Ivy. I’ll give it you when you call back.
Ivy Zelman – Zelman & Associates
Okay. No, that will be helpful.
I guess that brings us to the subject you are obviously seeing some of the pressure with fragmented customer base you mentioned 30,000 customers. Many of your customers are small companies.
Are you hearing from any of them any pressure from having working – from working capital advancement to them by banks not being afforded to them? And is that part of your estimate in the increase from 25 basis points, I think you said to 45 basis points comes from in the bad debt expense or may be some discussions is to around that whole concern we are seeing for small businesses today?
Frank Boykin
Well, yes, I mean we are seeing pressure with a lot of our customers in terms of access to credit markets and not just our customers but the consumers are going through the same issues.
Jeff Lorberbaum
Yes, a lot of those customers, they use us for the bank which means that when they buy a product from us, they have already sold it. So, they collect the money on the product before they have to pay us, and they are using the credit lines we have in order to support their businesses, which is how they always work.
Ivy Zelman – Zelman & Associates
And if they are not telling and they are building inventory, then they have a problem?
Jeff Lorberbaum
If they are not selling, is that they are not buy.
Ivy Zelman – Zelman & Associates
So, if they don’t have a working capital need then?
Frank Boykin
We don’t care in inventory, most of them.
Jeff Lorberbaum
You can reduce – there is a way to be in our industry with basically purchasing all the product after you sold it. Now depending upon your needs in your working capital, you could actually make the sale, we can ship it to you and deliver it in less than a week, and they can install to the customer and many of them collect anywhere from 50% to 75% of the job the day they sign up for.
So, I mean they can actually exist with cash flow from the credit term and then they take the money and either they pay in cash or they get in credit cards and they get the money through the credit cards quickly. So, –
Ivy Zelman – Zelman & Associates
So, then Jeff are you trying to say then I’m sorry that you are not seeing that pressure for small businesses with a lack of capital issues that some of the other companies we talked to are?
Jeff Lorberbaum
I can’t say that there’s not – there’s not pressure in the market, but it’s not as drastic as if these were heavily inventory pieces and having to subsidize the inventory.
Frank Boykin
So, it’s not like selling to a distributor base.
Ivy Zelman – Zelman & Associates
Right. Now okay, great.
Al right, secondly just a bit broader picture when –?
Frank Boykin
In fact if I can just go back to your question on bad debt expenses –
Ivy Zelman – Zelman & Associates
Sure.
Frank Boykin
23 basis points for the quarter.
Ivy Zelman – Zelman & Associates
I’m sorry, how much for the quarter?
Frank Boykin
23 basis points.
Ivy Zelman – Zelman & Associates
23 okay. Great.
Just a broader question, do you have any plans – you guys have right now after the nine you have taken the sites closed?
Frank Boykin
A bunch.
Jeff Lorberbaum
I would say above a hundred. I don’t have the numbers in front of me of all the different divisions and pieces.
Ivy Zelman – Zelman & Associates
The reason I asked is that it is hard for you guys as we realize to be in a position where you don’t have a crystal ball, you don’t know how bad the world is going to be and certainly we appreciate that. But we also – if there must be sort of a sense, okay, our operating, manufacturing facilities can actually produce this many housing starts or this much non-res put in place in terms of dollars as well as in the home improvement dollars.
So, you have a capacity utilization rate that will generate at full capacity dollars and revenue. And we are just wondering if you would break it down into chunks so that the non-res, commercial, home improvement and new res, what are you underlying assumptions for keeping the amount of capacity you are at today, open, instead of chasing it I feel like you are chasing it downward.
Have you a – do you have macro perspective on each of those buckets that you use to make the decision, okay, we need to close nine sites because we think housing stars are going to run it. 2009, you know, 750,000 or 500,000 etcetera, etcetera?
Just try and understand how a company like you will be a company that’s generating as much as $6 million revenues go about trying to stay ahead of the curve and what you are using for macro forecast?
Jeff Lorberbaum
We do have our own estimate of what’s going to happen for the year. We’ve then bracketed between our high and our low point.
We make plans let’s say, if we end up in this part of the range what action should we take by product type, may go down by business, by product type and then even with the net because of the backward integration is not a line, it’s different material manufacturing plant that’s supporting other things, as if. And so, we take each of those, we develop an estimate for the overall business, we develop an estimate for each product category, and then we determine what they should be.
Now within there you are going to have multiple options. You can at the peak of the – at the peak of the industry cycle, we were probably running everything close to 7 days a week, 24 hours a day.
So, you start reducing shifts, you start reducing production within the lines. Some of the lines have unique attributes that other lines don’t have as you go through.
And I don’t want to make it more complex but you have to get down to the very minute detail and unlike some industries which have one piece of equipment and all does the same thing, we have a lot of unique pieces going after different industry, different parts for the industry. Ceramic –
Ivy Zelman – Zelman & Associates
And Jeff, and Jeff, I totally appreciate that. I guess we are trying to get it a little more inside your thinking strategically.
Jeff Lorberbaum
Yes.
Ivy Zelman – Zelman & Associates
You know, for example, let’s say we are a little bit more bearish thinking sense on non-res put in place, just a sense of where you are, so when we are modeling and we get some inputs from you, I think it’s helpful to understand where you are in the big picture and I don’t know that we’ve gathered that from you in this discussion right now so far?
Jeff Lorberbaum
You have answer for that one?
Frank Boykin
I guess –
Ivy Zelman – Zelman & Associates
We could talk off line if you want to –?
Jeff Lorberbaum
We can give you. What happened to each one of the divisions has different answers for the same piece.
Each one has different circumstances in the markets they are in. And so, depending upon where it is, even picks up in the commercial business.
We have one piece in one segment, another is in another. They are going after different pieces.
Once they have different views of the same product, the same opportunity. We have – in the carpet industry, we have some part of our business is really focused on hospitality.
So, that’s got its own segment of what it is and what that part of the business is going to do. We have the same hospitality in our ceramic business, but have a different view of the same thing depending upon what project and construction in new things are going on.
So, if you want to call us, may be we can try to break it down, but we start out with one piece and if it goes through the different segment, they end up with different conclusions. At the same time some of the different manufacturing capacity some can be stopped and started and others have to run continuous.
And if you have things that can stop and start, you do one thing, if you have that runs continuous, you have to either shut down whole plants or whole line, but the other one you can run it part time. And it’s different decisions through it.
Again if you call us back we’ll try to give you some more clarity to help you.
Operator
Your next question comes from the line of Carl Reichardt of Wachovia
Carl Reichardt – Wachovia
Hi, guys. Actually you got almost everything except I was curious as to your 2008 domestic versus international sales, but obviously I know you got limited visibility on ’09, but do you expect any significant change?
Frank Boykin
I’m going to have to – it will take me a couple of minutes to find that Carl in terms of the split, but we still have time on the call I’ll let you know.
Carl Reichardt – Wachovia
Okay. I appreciate, thanks.
Operator
Your next question comes from the line of John Baugh of Stifel Nicolaus
John Baugh – Stifel Nicolaus
Yes, this is – quickly we are eight weeks into the quarter. Would you care to comment on the greater sales decline relative to the 17% decline in Q4 constant currency?
Jeff Lorberbaum
All parts of this business are declining. The customers we believe are reducing inventories in the period, just like we talked about our own business that we used to raise it.
So some of them also used to raise it those are being contracted as you go through. We believe that businesses are postponing purchases that we see a further decline in the industries volume rate from fourth quarter to first quarter.
John Baugh – Stifel Nicolaus
Right. And then, Jeff, more interested in wood and ceramic and laminate concerning this question, any feel for the competitor fall-out to date or anticipated?
Jeff Lorberbaum
You have to take each business just sort of unique. The ceramic business in the US what you have is a dramatic – you see a significant contraction in the imports, which are spread throughout the world in different pieces and to the imports of taking a significant reduction.
I can tell you in Europe that ceramic manufacturers are going to go through a dramatic contraction over there from two points. One is, that the base business there has declined in our ability to export, which was a major piece to continue to decline.
So that industry there is going to contract significantly. What else?
The wood, ceramic, and laminate. Laminate in the US is going through a contraction that it hasn’t gone through historically and so you have a lot of smaller players that are going to have a difficult time getting through it, maintaining the business.
The imports have declined somewhat overtime as the capacities moved over to the US. Lot of it coming out of Europe and less of it today as it declined I think that in Europe you are going to have a significant, there got to be a significant reduction in the capacity in Europe for some of the same reasons we discussed of ceramic, which is the export upside.
There is more local producers around the world and as the European economy has contracted. So you will see a contraction there.
What else? Well some companies are under great stress as we speak, but most likely many of them, some of them aren’t going to get through it and the question becomes that the asset gets shutdown or do they just change hands.
In this environment in both countries the ability to raise capital or buy things are here so there may be some capacity shutdown that hasn’t happened historically. The wood business has been contracting, it’s been consolidating and there probably will be some more of it.
I don’t know how to get out closely, you have to go by each to supplier into the industry and determine whose is capable of making it through the downturn.
Operator
Your next question comes from the line of Keith Hughes of SunTrust.
Frank Boykin
Hi, Keith before you ask your question, let me just say we have got about 15% of the sales for the year outside of North America, for the question I was asked earlier. Sorry about that.
Keith Hughes – SunTrust Robinson Humphrey
That’s okay. On Columbia, you had talked about $4 million to $5 million of losses in the first quarter, is that just the kind of loss level that we are going to see from that business until hardwood volumes improve or is there something on the cost side you can do to get these losses down without the volume?
Jeff Lorberbaum
What happens to it is we have done to get the cost down, but what happened is as we reduced the cost, the volume has gone down and offset the cost improvement. I mean we have reduced the staffing of the plants dramatically, we have improved the quality of the plant, I think we have not achieved the sale of the new product as much as we have because in this environment it is difficult to get people to take on new products new lines as they are trying to minimize cost.
So as we went into this things we really assume we will be able to increase our distribution more than we have been accomplish and at the same time we would be able to improve our product mix and so we are having a more difficult time accomplishing the sales side. I think the structure from the back side, we put in new systems in the place, we put in new automation in the places, we have created we believe the best product line in the industry, so we need some help at the same time we are still looking to cut cost as already have the other parts to do.
Keith Hughes – SunTrust Robinson Humphrey
Jeff to get more distribution are you pushing more direct sales, Mohawk sales, or more through the distribution base?
Jeff Lorberbaum
We are going both at the same time. We have more control over the Mohawk piece as you would suspect.
So, the Mohawk piece we are putting out more samples of product in the field as we speak, we are investing in those in the last quarter and in the going forward quarters in order to get distribution to the Mohawk side on the other – the distribution side we used two brands Colombia and Century and as you would suspect it is difficult to get third parties to invest in anything in this environment we are in. But we are getting some it is just the magnitude we would like it to be.
Operator
Your final question comes from the line of Laura Champine of Cowen & Company.
Laura Champine – Cowen & Company
Hi good morning. This is actually – I call in for Laura, seems to getting late, I just have a quite housekeeping question on – in regards to the foreign exchange losses that you guys got in Q4, can you shed any light on Q1 or all of 2009 in terms of what you are expecting in the other expense line?
Frank Boykin
I mean, I am not able to forecast what the exchange rates are going to be –
Jeff Lorberbaum
Where do they come from to the two pieces?
Frank Boykin
Well the exchange rate losses we had are basically coming out of Mexico with the manufacturing operations we have down there and as the peso declines in value for the quarter and the next, the decline in value that is reflected in the financials (inaudible) P&L and that is what we saw in the fourth quarter.
Jeff Lorberbaum
Doesn’t the asset value also go up and down?
Frank Boykin
Yes that was I was talking about.
Jeff Lorberbaum
If the asset value as well as the sales of the translated back as well as the margins and profit I will get impacted with the exchange rate.
Frank Boykin
I can talk to you off line about the process, but we are not prepared with the forecast with exchange rate for the end of the year.
Laura Champine – Cowen & Company
Okay thanks.
Operator
Thank you. I will now return the call to Jeff Lorberbaum for final remarks.
Jeff Lorberbaum
Thank you. This is a very unusual environment we are in.
We are taking aggressive steps to manage our cash within the business. We believe we have a good structure underneath with a balance sheet and financials to manage through the environment, for making trough decisions of reducing staffing and cutting cost as we go through, we think we are positioned well to get through this and we will continue to do everything to maximize our business in the short-term.
Thank you for being on the call have a good day.
Operator
Thank you. That does conclude today's Mohawk Industries fourth quarter 2008 earnings conference call.
You may now disconnect.