Apr 24, 2009
Executives
Jeff Lorberbaum – Chairman and CEO Frank Boykin – CFO
Analysts
Michael Rehaut - J.P. Morgan Eric Bosshard - Cleveland Research Company Stephen East - Pali Research David MacGregor - Longbow Research Sam Darkatsh - Raymond James Daniel Oppenheim - Credit Suisse David Goldberg - UBS Keith Hughes - Suntrust Robinson Humphrey Laura Champine - Cowen and Company Dennis McGill - Zelman & Associates [Barrett Eamon] - Brownstone Asset Management John Baugh - Stifel Nicolaus & Company, Inc.
Operator
Good morning. My name is [Mindy] and I will be your conference operator today.
At this time I would like to welcome everyone to the Mohawk Industries first quarter conference call. (Operator Instructions) I would now like to introduce Jeff Lorberbaum, Chairman and CEO.
Mr. Lorberbaum, you may begin your conference.
Jeff Lorberbaum
Good morning and thank you for joining us to review our first quarter results. With me on the call I have 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 risks and uncertainties, including but not limited to those set forth in our press release and our periodic filings with the Securities and Exchange Commission. This call may include discussion of non-GAAP numbers.
You can refer to our press release at the Investor Information section of our website for a reconciliation of any non-GAAP to GAAP amounts.
Jeff Lorberbaum
Thank you. Our first quarter sales were $1.2 billion, a decrease of 30% from 2008, and included 2 fewer days than last year.
We recorded $122 million charge from Encycle, a discontinued carpet tile backing. Sales declined 20%, excluding the sales allowance, on a constant exchange rate with comparable days.
We had a loss in operating earnings of $146 million as reported. We had operating income of $42 million excluding the carpet tile charge, the $62 million FIFO inventory flow through, and a $4 million restructuring cost.
Our earnings per share in the first quarter was a loss of $1.55. We have stopped shipping the Encycle backing system and are currently providing products with an established technology and proven history.
We're satisfying our customers and have recorded the expense. All segments anticipate positive operating income in the second quarter.
In the quarter we generated $38 million of operating cash flow, which is $118 million improvement over the first quarter 2008. Working capital improved, with inventories going down $183 million.
The balance sheet remains strong, with a cash balance of $137 million and credit availability of more than $800 million. The business is emphasizing cash management by reducing costs, minimizing working capital, and cutting capital expenditures.
This year we estimated depreciation and amortization of $290 million and capital expenditures of $125 million which have not been fully committed. Our expected cash flow and capital structure will allow us to successfully emerge from this downturn.
The economic conditions in both the U.S. and Europe have remained weak.
The industry is soft in all channels, including new and existing home sales, residential remodeling, and commercial. Our customers have a guarded outlook and are minimizing inventory levels by reducing purchases below demand level.
Commercial construction and remodeling projects are being postponed due to the uncertainty in the economy. The government stimulus, low interest rates and easing credit should improve the residential business as we go forward.
Frank, would you give the financial report?
Frank Boykin
I'd be glad to. As Jeff stated, our net sales ended the quarter at $1.208 billion, down 30% from last year.
We recorded a $122 million charge, which included $110 million sales allowance and a $12 million inventory reserve for discontinued carpet tile backing. Excluding this sales allowance and on a constant exchange rate and days basis, the sales decline was 20%.
All segments and most product categories were down year-over-year. Our gross profit was $154 million or 12.7% of net sales.
Included in cost of goods sold impacting our gross profit is the $62 million charge for FIFO inventory cost flow through from the fourth quarter. In addition, we had the $12 million charge for the carpet tile inventory writedown and a $4 million charge related to the restructuring.
Gross margin excluding these charges would have been 25.9%. SG&A came in at $300 million or 24.8% of sales as reported.
SG&A is down 11% year-over-year. As a percentage of net sales, SG&A would have been 22.7% if we exclude the sales allowance.
The operating loss was $146 million. Excluding charges of $122 million for the carpet tile charge and $62 million for the carpet raw material cost flow through and $4 million for the restructuring charge, operating income would have been $42 million or 3% of net sales.
Interest expense was $30 million, which is down slightly from last year. Both rating agencies, as we previously reported, have downgraded us to a rating of BB+.
This will result in an increase of our interest expense by 50 basis points on our outstanding bonds and equates to about a $7 million incremental interest charge annually. Our income tax benefit was $73 million for the quarter.
We had an unusually high tax benefit and a tax rate of 41% this quarter, and this higher rate is due to quarter to quarter changes in our earnings; however, for the future quarters - 2, 3 and 4 - we anticipate a tax rate in the range of 20% to 22%. Our net loss was $106 million and loss per share of $1.55.
Excluding the carpet tile charge using a 41% tax rate our loss per share would have been about $0.49. If we jump to the segments, the Mohawk segment sales came at $594 million or down 34% from last year.
Sales excluding the carpet tile allowance would have been $704 million or 22% or down 20% on a constant days basis. Our price increases appear to be holding, however with some pressure in limited areas.
Our operating loss was $179 million and includes the $62 million FIFO inventory charge and the $122 million carpet tile charge. Our raw material costs have remained low.
Operating income excluding these charges would have been $5 million at about a breakeven level. Dal-Tile sales came in at $368 million or down 20% from last year.
The sales would have been down 16% using a constant exchange rate and a constant number of days. We are continuing to improve our market position in this segment.
Operating income was $21 million or 5.9%. We were negatively impacted in this quarter as we took our production capacity down to reduce our inventory levels.
The Unilin sales came in at $268 million, down 34% from last year. Sales were down 24% using a constant exchange rate and number of days.
Operating income was $15 million as our board businesses continue to be under pressure. We had a negative impact from exchange rate in the quarter of $3 million.
Operating income excluding the charge of $4 million for a wood plant closing would have been $19 million or slightly over 7%. Our corporate segment resulted in an operating loss of $3 million, which is in line with last year.
If we jump to the balance sheet, we ended the quarter with cash of $137 million, representing a $43 million increase from the fourth quarter, and included $85 million in cash investments. Receivables ended at $785 million or slightly over 48 days.
We had some impact from negative channel mix and some deterioration in our aging, but it continues overall to still be in reasonably good shape. Inventories came in at $986 million representing 3.8 turns for the quarter.
We continue to drive inventory down in all segments, with inventories going down by $183 million since the end of the fourth quarter. Our fixed asset at $1.9 billion included capital expenditures of $27 million and depreciation and amortization of $68 million during the first quarter.
As Jeff had reported, we expect the full year CapEx to be in the range of $125 million, with depreciation and amortization in the range of $290 million. Our total long-term debt ended up at $1.981 billion.
During the first quarter we generated $38 million of cash flow from operations, which is a $118 million improvement over last year. We also generated $11 million of free cash flow.
I'd like to take a moment to remind everyone of our capital structure. We have a bank facility in place with approximately $830 million of availability that expires in the fourth quarter of next year and a receivables securitization with availability of $250 million that expires in the third quarter of this year.
At the end of the first quarter this year we had drawn about $115 million on all of these facilities, plus we had another $120 million committed against letters of credit. The one covenant we have is a debt-to-capital covenant with a 60% limit and at the end of March we were at 42%.
We don't believe we have any risk in violating this covenant. Our next term loan payment is due in the first quarter of 2011 for $500 million.
We are anticipating good cash flow through the year. We expect that the impact from the carpet tile allowance will be about $80 million net of taxes over the next two years.
We don't have any immediate needs to change our capital structure, but we continue to look at alternatives. The bond market continues to improve and offers an option for long-term financing.
We've had discussions with banks to understand our options there as well. Asset-backed loan revolver appears to be the best alternative and we believe we could support up to a $600 million facility.
The current market conditions include a three-year term with approximate upfront fee of about 400 basis points and an approximate LIBOR spread of about 400 basis points with no financial covenants. We strong believe that we have sufficient cash flow and credit availability to manage through this environment.
Jeff?
Jeff Lorberbaum
Thank you. All segments continue to focus on cash generation or reducing infrastructure, operating costs, CapEx and working capital.
Our management is actively pursuing all opportunities to improve the business and position us for the recovery when it occurs. During the quarter we cut employment levels by almost 2,000, shut down four operations, reduced warehousing by about 1 million square feet.
We reduced production units below sales levels to bring inventories down during the quarter. This lower capacity utilization negatively impacted overhead absorption and reduced margins in the first quarter.
The Mohawk segment sales declined 34% as reported. The sales declined 20% excluding Encycle allowance with constant days.
We've been shipping the backing for about two years. In 2008 most of our carpet tile was shipped with our proven vinyl technology.
The Encycle backing accounted for less than 15% of our total commercial volume. Under certain circumstances we have technical issues with this backing related to product acclimation, site conditions and installation specifications where the tile did not lay flat.
We are satisfying our customers. In most of our carpet tile production we use our established vinyl backing and has exceeded market expectations for more than 15 years and shipments will continue on schedule.
At the end of the first quarter we recognized we had a higher trend of incidents occurring on the Encycle backing and recorded a $122 million allowance to cover remediation where needed. The majority of the cost is for labor to correct the affected installation.
Last fall we also developed a new thermal plastic technology. The new technology's performing well at select projects across the country and we'll increase the shipments over time.
In the first quarter, our commercial carpet sales were in line with the industry. Raw material costs have remained relatively stable since the end of the year and, based on current estimates, they increased slightly [from] the year end.
Our margins are showing improvement as we progress through the period, excluding the impact of the unusual events. Industry pricing has remained relatively stable, with pressure occurring in some specific areas.
Seasonal sales improvements will increase capacity utilization and second quarter results should be positive. During the period we reduced headcount by over 1,000 and closed two plants to adjust to lower demand.
Our emphasis on tighter quality controls, improved processes, product reengineering and monitoring systems are improving our costs. Profitability improvements and staff reductions are enabling us to control our direct labor cost per unit, even with utilization declining.
We have made further reductions in selling, administrative, marketing and distribution expenses. We continue to align the business structure with demand.
New product introductions are being delivered to customers and should positively impact sales. Our hard surface products continue to have a greater decline due to the impact of new residential housing to the total.
The Federal Trade Commission recently announced that they approved the first new carpet fiber since nylon was introduced 50 years ago, which we use in our SmartStrand and Sorona products due to its unique characteristics, which provide higher durability, stain resistance and softness. This is a confirmation of the premium attributes of tour SmartStrand product and it should benefit our position in the market as we go forward.
In anticipation of federal spending our commercial business is emphasizing government, education and health care markets, where we have either a number one or two position in the market. The breadth of our product offerings allows us to satisfy the complete needs of any project whether styling, performance or budget-focused.
Our new product introductions are providing greater value to meet the needs of tightening budgets. The Dal-Tile segment sales were down 20% in the quarter or 16% on a constant exchange rate with comparable days.
Our commercial sales continue to decline as business investment deteriorated in the period. We believe our overall market position has improved due to our strong distribution capability.
Higher unabsorbed overhead costs compress margin as we cut inventory levels by reducing production. In addition, our distribution and selling costs were deleveraged due to lower volume.
We continue to reduce sales, marketing, administration and distribution infrastructure. We consolidated several low-volume service centers, as well as reducing staffing and renegotiating rents in many others.
We've improved our manufacturing productivity, product yield and distribution costs. Material costs have been reduced by using suppliers closer to our operations, with lower transport costs.
New warehouse management systems and freight strategies are being executed to lower inventory levels and trucking costs. We're introducing a new engineered stone program that's used both for inside and outside applications and a new wood program that our architect representatives will begin specifying.
Our commercial sales efforts are focused on government projects in military, education, public housing and prisons similar to the Mohawk [inaudible]. We continue to gain position in the home center channel at the expense of imported ceramic alternatives.
We continue expanding our distribution and product line in a Mexican market which is performing better than the U.S. market.
We also received Dealer Choice awards at the shows as well as the Floor Trend Styling Excellence Award this quarter. The Unilin sales declined 34% or 24% with a constant exchange rate and comparable days.
The rate of decline was more challenging in the first quarter with the economic slowdown becoming more difficult and customers reducing their inventory. Our U.S.
and European laminate business reflected a slight improvement in the latter part of the quarter due to positive acceptance of our new introductions reaching the market. In Europe we introduced a new scratch guard protection which significantly enhances the durability and life of our laminate flooring.
The Russian market continues to perform better than the rest of Europe and we began locally inventorying product to improve our service and expand our customer base. We signed additional license agreements for our patents, but our volume-based revenues have contracted with the industry.
Board selling prices and volume are still under great pressure due to the excess capacity and low demand. The roofing structure sales have continued to decline with the market.
In the first quarter we reduced inventory, warehousing, direct labor, selling and administrative costs. In the U.S.
we introduced new products to satisfy the more value-conscious consumers. We've launched a new line of wood products to transition previously sourced products to internal production.
We are consolidating the management structure of our board products. We've temporarily closed one of our wood flooring plants in the U.S.
and recorded a $4 million restructuring charge. This will reduce production costs until the capacity is required.
In the second quarter we're considering the closure of a European laminate flooring plant, which will consolidate two operations together if it's confirmed. Seasonal improvements in volume should increase utilization rates and positively impact all of our businesses in the second quarter.
All of the segments are expected to have positive operating income in the second quarter from higher production rates, cost reductions, lower infrastructure and reduced material and energy costs. Based on these factors, our earnings per share guidance for the second quarter is $0.43 to $0.52 per share.
Excluded from this guidance is an estimated second quarter restructuring charge of about $15 million related to potential capacity reductions. We do not see significant change in the flooring category in the near term.
We're maximizing sales opportunities while managing the cost structure and working capital. We continue to reduce infrastructure based on industry conditions and maximize our cash position.
When the recovery begins we should benefit from the restructuring and other initiatives that have been implemented. With that, we'll be glad to take questions.
Operator
(Operator Instructions) Your first question comes from Michael Rehaut - J.P. Morgan.
Michael Rehaut - J.P. Morgan
First question - and this is something, Frank, we've talked about before - I was wondering if we can just hit on this again. In terms of the raw material flow through on the Mohawk line, consistent with your expectations last quarter you had about a $60 million as you worked through some of the higher cost inventory.
With that, I guess, done and 2Q reflecting more current inventory or raw material prices I was wondering if you could, in looking towards 3Q and 4Q perhaps, with oil where it is right now, with nylon and polypro where they are right now, do you expect any incremental benefits from raw materials headed into the back half or from the cost side, given the current environment and pricing, the 2Q guidance that you've given, does that largely reflect the recent coming down in commodity costs?
Frank Boykin
The commodity costs during the quarter remained relatively stable from the end of last year. As we look out in the future, as far as a guess, but we believe that going forward the material costs should remain relatively stable through the year.
There are some indications it may go up, so the projections aren't perfect and the last two years they haven't been any good at all. But assuming that they're relatively stable, that's good with it.
And we don't perceive that there's significant benefit from a decline over the second half of the year.
Michael Rehaut - J.P. Morgan
I'm just talking about relative to the 2Q, your guidance in 2Q, the assumptions that you're building into there in terms of material costs. My question more is that there's not like a continued drag from the higher costs of last year affecting 2Q, but rather 2Q is more reflective of the improvement in commodity costs that we saw in the back half of '08.
Frank Boykin
That's correct. I mean, if anything there might be a slight - there's some timing, possibly, of some inventory to a little more or less that drag over or not, but for the most part we'll operating on the costs from the lower cost structure.
Michael Rehaut - J.P. Morgan
The second question, just as it relates to Unilin, you know, that's been an interesting story from a margin standpoint over the last couple of years. Initially when you acquired it, given that the volume was better than expected, you got some great through put or follow through on the margin side.
Now we're in the mid 7 percentage range the last couple quarters. What are you thinking about that going forward and are there incremental restructuring actions that you can take or from here on in is it going to be more of a volume-driven story?
Jeff Lorberbaum
To begin with, we're cutting costs there, too. I think in the first quarter we reduced the personnel in the business by I think over 300, so I don't want you to believe that we're not taking action to manage the business in all the various segments.
In addition, you're correct, but if you look at the EBITDA in the first quarter it was actually 18% EBITDA, which is not a bad position to be in, which we think is much better than the entire industry is anywhere close. As we go forward we're going to continue managing the pieces.
It's not any different than the rest of our business. The European economy has deteriorated rapidly, like the U.S.
economy. The part that's related to housing has dropped dramatically with credit.
Markets like the U.K. and Spain are off much more, which we have significant business in.
So the same thing the rest of business is dealing with we're dealing with there, too. As we look forward, it's going to take awhile for some of the conditions to change.
Our laminate flooring business is actually doing the best of all the different product categories in the business. The other pieces where we have boards that we use internally and externally, the external portions are at very low pricing in the marketplace.
They're highly capital intense businesses and so those businesses have gone from a year or year and a half ago at cyclical high margins, they've gone to basically cash costs is it in those kinds of pieces, which it typical. There is capacity coming out of those and there'll be more capacity coming out, and the companies with good low-cost positions, which we have, will end up doing very well once we get through this portion of the cycle.
What else can I tell you about?
Frank Boykin
Mike, one thing I would add is we will see improvement, I would say, from Q1 sequentially into Q2, 3 and 4 in the margin for Unilin, but we're not going to see them at the same level that they were last year until we see some volume improvement.
Michael Rehaut - J.P. Morgan
Is that more related to a seasonal trend or is that more a flow through of some of the cost actions that you've taken?
Frank Boykin
All of the above.
Operator
(Operator Instructions) Your next question comes from Eric Bosshard - Cleveland Research Company.
Eric Bosshard - Cleveland Research Company
I know in 4Q you tried to underproduce to fix the inventories and it didn't work out so good because the volumes were lousy. Can you talk about in 1Q how much you underproduced and now are you kind of done with that effort?
Jeff Lorberbaum
Comparing the first quarter to ongoing, we cut the production rates in all the various business below, which is what allowed us to reduce the inventory levels from the fourth quarter to the first quarter. If you look forward, just in general we have a lot of businesses with a lot of different rates they're running at, but in general I would say the majority of them will probably improve from the first quarter to the second quarter somewhere in the neighborhood of 10% to 15% in the utilization rates as we quit pulling down the inventories as much and as the seasonal increase in business is coming along, which should have a positive impact on us.
Eric Bosshard - Cleveland Research Company
So should production match sales in 2Q or will you still underproduce a bit?
Jeff Lorberbaum
Well, a lot of it depends on the demand levels and where we are. The basic plan set up today is to keep them flat to down slightly, but that can change based on what happens with demand.
Frank Boykin
So we would think production and demand would be kind of close.
Eric Bosshard - Cleveland Research Company
And then my follow up is you made the comment sequentially the Unilin margin should improve from the 1Q level. Can you make the same statement about the tile margin?
Frank Boykin
Yes, we should see some improvement there as well due to the capacity utilization.
Operator
Your next question comes from Stephen East - Pali Research.
Stephen East - Pali Research
First question, just sort of to follow on what Eric was asking, just a little bit differently, if you look at specifically with the Mohawk segment - because I assume that's where, one, you saw most of the raw material pricing pressure that came through; two, probably the greatest capacity utilization decrease - if you looked at it either on dollars or as a percentage of sales, what type of margin swing would we expect to see 1Q to 2Q in that division?
Frank Boykin
We were flat at the end of Q1 if you pull out all the unusual items and hopefully we can kind of be in the mid single digit range going forward, a little bit higher or maybe a little bit lower depending on what happens with demand.
Stephen East - Pali Research
And then the other question, Jeff, you talked about what you expect for raw material pricing as you go through the year. If you look at your product pricing, so far it's been pretty stable, you said, with a few items ticking down.
What's your expectation as we move through the year given both the demand cycle and as raw materials have backed off relative to last year?
Jeff Lorberbaum
I mean, our assumptions are that there'll continue to be pressure on the pricing in the marketplace. The entire industry has more assets than the industry needs.
So far we as a company have tried to maintain discipline in it. We're going to continue to do that.
On the other hand, as in any time you have, the more commoditized products, they tend to have more volatility in the pricing, which is where more of the pricing pressure is today. The other thing that's going on is the mix change of the customers.
As the customers have tried to reduce their expenditures and budgets, there's a downgrade in the average quality across all the different businesses and segments. And then the same thing, as we try to maximize our exposure to the marketplace, there are areas that we might not have been as aggressive in participating in at points in time; we're broadening out our participation in all categories.
And the combination of those things are lowering the mix on top of the pricing.
Operator
Your next question comes from David MacGregor - Longbow Research.
David MacGregor - Longbow Research
I guess on the 24th of February we were chatting on a conference call and you'd indicated guidance of $0.80 to $0.89 loss and 35 days later you put up a pretty good number, much better than that. So what outperformed your expectations over the balance of the quarter?
Frank Boykin
If you look at the operating margin level and exclude what happened with the tax rate, I would say that it spread throughout each of the three segments equally and there's not any one thing that stands out other than we've continued to focus in each of the divisions and each of the segments on cost control, cost cutting, and that's really helped us in the quarter.
David MacGregor - Longbow Research
How much was the tax rate?
Frank Boykin
For the first quarter?
David MacGregor - Longbow Research
Well, no, you cited that as sort of driver behind having -
Frank Boykin
Well, it was 41% was the benefit, right? It was 41% in the first quarter.
And I think as I'd mentioned in my remarks that going forward into Qs 2, 3 and 4 it's going to be the 20% to 22% range. You get really unusual tax rates with the fluctuation between quarters the way we've had over the last few quarters in earnings.
David MacGregor - Longbow Research
I guess as a follow up I'd be interested in your thoughts on the distribution infrastructure that you've talked about as a potential cost saving opportunity and how much opportunity is left there? Are you concerned about exiting markets or the operating costs of having to ship longer distances once diesel gets back to $4?
Jeff Lorberbaum
We've continued to look through the distribution system and try to find ways of improving it. There are many ways of doing it.
You start first with the shipments from the factory to the end point and we're finding ways of re-working the business where we don't touch it as many times or stop as many times between points. We look at modes of transportation, how you put more of it on lower-cost modes.
We look at how to manage the loads, where you raise the weight on each load to do that, and there's a balance between those things and the service levels that go along with them. Within those, you then go back to the warehousing out in the marketplace.
At points in time a few years ago we made decisions that the business was going to expand for a period of time and we actually rented warehouse space that was more than we needed at the time expecting to need it in the future. And so we're [thinking] - and we've taken some in the fourth quarter and other periods - about writing off certain amounts of the space and moving out of those spaces as we go through.
We've talked about the Dal-Tile system. We have 250 service centers.
At the service centers we have reduced the number of people in them. We're looking in certain marketplaces as the volume comes down where we could three or four of them could we do with one less?
Can we consolidate them together and maintain the business? And we're making some decisions to do that.
We're renegotiating rents. Where the rents are coming up in the near we're renegotiating rents and getting some concessions on rents as we go through.
So we're doing a lot of things to manage it and hopefully we can find the right balance between service and cost.
David MacGregor - Longbow Research
How would you assess the remaining potential? It sounds like you've done a lot already, which is to your credit.
I'm just wondering what's left in terms of upside.
Jeff Lorberbaum
I can tell you that in every part of our business there are contingency plans being made for every part of the business and the question we put down what if things get worse? If they get worse, how can we do them?
And then there's other parts of the piece that say are there information systems and things that can allow us to operate the business different? Today we have new planning systems that have been put in and are still being executed in the Mohawk segment.
We have new warehousing systems that are being executed in the Dal-Tile system. We have - we call it a service center system - on the bottom end.
All of these things allow you to see what's going on more and increase productivity, so those investments are being made which will help us reduce the cost further. And then again we're looking at have we taken out where we do multiple touches and are there ways of doing that?
And there are ongoing discussions in every category. I think there's probably some more left.
We haven't defined it yet or we would have executed it.
David MacGregor - Longbow Research
Do you move more towards independent distributors or do you just try to continue controlling your own distribution but on a more efficient scale?
Jeff Lorberbaum
The decisions are two separate pieces. We actually look at the distribution, the outside distribution, as potential customers and at all times we try to maximize our sales through that d4; channel because they have different relationships with customers.
One of the reasons our businesses are structured like they are, they have different brands and different products that segment them so that we can have multiple avenues to get to the marketplace. So that's one distribution channel.
Separate from that, the Mohawk distribution channels in the Dal-Tile and Mohawk segments will continue to be there and there's no plans to reduce those distribution strategies.
David MacGregor - Longbow Research
Just quickly, what's your update on expectations for sourcing cash from working capital in '09?
Frank Boykin
I think working capital's going to be a source. Is that in fact your question?
It depends, too, David, if we get real lucky and the business upticks at the end of the year, then I'll have to give you a different answer. But based on kind of where we're running right now, it should be a source.
David MacGregor - Longbow Research
Can you quantify that for us? I think you thought it'd be a source last quarter as well.
Frank Boykin
Yes, I think it generally runs, what, 18% of sales, in that range.
Operator
Your next question comes from Sam Darkatsh - Raymond James.
Sam Darkatsh - Raymond James
Just two quick questions. First off, in your prepared remarks you mention that, I think, the sales allowance would be $80 million over the next two years.
Does that mean that you'll continue to take allowances against sales and EBIT like you did in the first quarter going forward or is that an offset to what you already recognized in terms of charges in Q1? I'm confused as to the go forward impacts of the Encycle allowances.
Frank Boykin
Let me try on that one again. So we set up a reserve of $110 million to use for future payments that we'll make for remediating the issues.
That's our estimate for what it's going to cost in the future and we expect that it'll be paid out over two years. So that is our best estimate, conservative estimate, and we don't anticipate having to do anything in terms of P&L charges in the future.
The $80 million was cash. I just want to make sure you understand that.
That's cash.
Sam Darkatsh - Raymond James
The restructuring actions that you took Q4, Q1 and then upcoming in Q2, I think if my math holds is roughly $45 to $50 million or so. Can you give us a sense of what the structural cost that that $50 million P&L impact has been able to take out of your cost structure?
I know some of the savings are going to be dependent upon volumes, but to get a sense of what kind of permanent cost has been taken out?
Jeff Lorberbaum
We tend not to develop our numbers from the perspective you do. We start down with the bottom of it and say what manufacturing assets are required, what flexibility is required, how do we manage the cost structure to do that, and it's a bottom up structure that we then take it from the top view.
What we end up doing is analyzing it from a percentage of sales revenue and then we focus on that as a basis to develop our future estimates and earnings for the rest of the year internally. And so we really don't roll them up in the manner that you are looking at it from.
It's an adequate way of doing, we just do it more from the bottom up rather than the top.
Sam Darkatsh - Raymond James
But you would still, I would imagine, have a hurdle rate with any kind of capital allocation decision that you're making and a restructuring action, I would guess, would qualify as a capital allocation decision. How should we look at normally a -
Jeff Lorberbaum
Well, let me tell you, the one in the first quarter, there was $4 million and the $4 million should take at most a year to get back. How's that one?
Sam Darkatsh - Raymond James
Is that normally the standard for our purposes, Jeff?
Frank Boykin
It's going to vary, Sam. Some are going to take longer and some are going to take shorter depending upon the complexity and the location and deal with different, for example, laws here in terms of timing and what you can do with things as opposed to outside of the U.S.
Jeff Lorberbaum
In some cases, you know, there are non-cash write-offs and cash write-offs so depending upon each one, it's a write-off but it may be that it doesn't cost us any cash and you get it back Day 1.
Sam Darkatsh - Raymond James
And final follow up regarding the restructuring would be are most of these cost extractions of a more permanent nature or would they be coming back should the volumes return?
Jeff Lorberbaum
The majority of the time that we write something off, it's permanent. Now, the one in the wood business, that one's mothballed so the costs are basically getting rid of the people, the inventories and managing the change from one plant to another because we believe down the road we're going to need it.
Other than that, in most cases they're permanent forever.
Operator
Your next question comes from Daniel Oppenheim - Credit Suisse.
Daniel Oppenheim - Credit Suisse
Frank, earlier you were talking about margins improving as the year goes on, but also talking about only limited price pressure in some areas. Can you talk about that sort of among the segments, where you are seeing that pricing pressure?
Frank Boykin
Pricing pressure in each of the segments, I would say in terms of selling prices, as Jeff had mentioned, we are seeing pricing pressure in commodity products and in certain promotional areas as well. In Dal-Tile we've seen some pricing pressure with some of the surcharges that we've put in place.
Jeff, I don't know if you want to address anything beyond that.
Jeff Lorberbaum
Again, across all businesses, the more commoditized the products are, the less differentiated, the more pressure on the prices everywhere. And then the other part, which is hard to put a number on, is the mix change, which is the customers purchasing, even though we haven't changed the selling prices, they're buying more lower-margin products as you go through.
And those things are impacting the average selling prices. And then the third piece is historically we manage how much we do in different channels and different price categories and in the environment we're in we're being more aggressive in participating in some lower-margin areas that we would not have when the industry was running wide open.
Now the other piece just to [inaudible] the board business in Europe, again, is different. The prices in that change readily - they go up and down - and the industry has given away all the margins to run the assets because of the high capital investments there and that's more typical of other industries.
Now those margins will jump back the other way when it goes the other direction also.
Daniel Oppenheim - Credit Suisse
In terms of that customer trade down and sort of buying more at lower price points, lower price points would generally be more commoditized. Would that then lead to lower margins in that as well, aside from lower selling price?
Jeff Lorberbaum
It already has.
Frank Boykin
The answer's yes.
Operator
Your next question comes from David Goldberg - UBS.
David Goldberg - UBS
The first question has to do with kind of the sequential sales trends during the month. We've been hearing a lot of reports nationally that we're seeing some foreclosure inventory get sold and clear the market and whether or not you guys think that's going to show up in your business and if not maybe why it's not showing up now.
Jeff Lorberbaum
The foreclosure piece depends on who ends up purchasing it and what the intent is. Historically when an existing home sold the new owner went in and then typically the wife, who makes most of the decorating decisions, would start saying this doesn't meet my expectations or I would like it to look different and they would start remodeling as soon as they had the economic ability to.
And that could happen the same day or it could happen over the next two or three years. The real question is: Who's ending up with the houses, what's the purpose that they're using them for, and is it personal use and then do they have the economic capacity to do the remodeling now or in the future?
And under all that is the answer, which we don't have the answer.
David Goldberg - UBS
So you're not seeing more of sales pickup sequentially through the quarter even though you're seeing some more turnover? You're not sure if it's because these homes are being purchased more by investors or because it's people that don't have the economic wherewithal to do the remodeling work right away, make changes, as it were?
Jeff Lorberbaum
Yes. But, I mean, at the same time I'm not sure it flows quite as fast as you have it.
If it got announced or signs a thing that he's going to buy the house, I don't know how long after it we'd see it because first they have to move in it, in many cases, and then they start remodeling it. On the other hand, I can't tell how many of these are being bought for resale or rentals in the short term by some people.
Operator
Your next question comes from Keith Hughes - Suntrust Robinson Humphrey.
Keith Hughes - Suntrust Robinson Humphrey
Jeff, can you give us any sort of feel for where raw materials in the carpet business stand right now versus the peak? How much have they come down, just in aggregate, not the specifics.
Jeff Lorberbaum
There have been dramatic changes from the peak. If you remember, the peak, we never raised prices enough to cover the peak back whenever.
And those peak costs, you know, it could be half as if from the peak. But, you know, if you remember back in the thing, the last 20% - 30% it went up, it went up and we never got any pricing for it.
Keith Hughes - Suntrust Robinson Humphrey
Right. I know polypropylene's down that much, but I guess I'm specifically more talking about nylon.
That's the one that's harder for us to find out information on.
Jeff Lorberbaum
They're all down in different ranges. I don't think I can get you any closer than that.
Keith Hughes - Suntrust Robinson Humphrey
Frank, you had mentioned $3 million loss in the wood business. Are you referring to Columbia, do I have that right?
Frank Boykin
I said a $3 million negative impact on FX is what I said, I thought, and that there was a $4 million charge related to closing the wood plant in Columbia.
Operator
Your next question comes from Laura Champine - Cowen and Company.
Laura Champine - Cowen and Company
I just had a question about capital spending. That $125 million level looks like about as low as it can go, but I'm guessing you don't need huge expansion next year either.
How long can you keep CapEx below $200 million or close to that $125 - $150 million level?
Jeff Lorberbaum
It really depends on the demand and expansion into either other markets or other product categories and the investments you make in those. If you go back a year or two we had on the plan to put up a new ceramic plant.
A new ceramic plant was going to be over $100 million just by itself. Now, with the industry where it is the question is - and it takes probably about close to two and a half to three years to get it up and operating from the decision point from zero to full capacity, so we're going to have to make decisions as we go along at what point you make those, so that would be one type of decision.
Another, it depends on our view of expanding into other markets in other places. We have talked about going into Russia and we're distributing, so another piece is at what point do we put manufacturing facilities in there to support our laminate business?
At the moment we think that we can minimize that type of expenditure by using present assets we own and restructure them around and limit the cost, but the big money comes in changing the business and doing investments to have it grow or support it or going into new products versus maintaining the present pieces is where the investments come in or deciding to extrude more raw materials or ore. So a lot of those decisions are demand driven and how we perceive it and some of those have to start, again, anywhere from 12 to 36 months before you want them.
Laura Champine - Cowen and Company
Right. So I hear that it's subject to change, but is it fair to say that your plan for 2010 is still sub $200 million?
Jeff Lorberbaum
Most definitely. I mean, unless something changes, I mean, basically we're doing what we have to do.
It could be that depending upon what happens we could be at the same level we're at this year. It could be that low.
Operator
Your next question comes from Dennis McGill - Zelman & Associates.
Dennis McGill - Zelman & Associates
Just two quick follow ups. On the guidance relative to what you actually delivered in the first quarter, I was hoping you could get a little bit more detailed relative to what you commented on earlier.
On the revenue side, was March any different than what you would have expected towards the end of February?
Jeff Lorberbaum
The problem with it is that the demand levels are so difficult to put in and we've been missing them so far, the whole business, you get very conservative in what you're doing because your projections, you go back over the last 12 months, we haven't hit one of our internal projections that we've done. And so you sit there and you start putting brackets around it and you try to estimate, you know, what's the high and the low and then we try to give the best information we can to the Street.
This is a difficult environment, which is why many companies don't give anything. So I can't really give you an answer except it's really got to do with the guesses of the future.
Dennis McGill - Zelman & Associates
So you're saying it's difficult to split out because your revenue assumptions and the brackets you put around revenue obviously are intertwined with costs and it's just the volatile market makes it difficult to kind of splice out exactly what was embedded in the $0.80 to $0.90?
Jeff Lorberbaum
I mean, we know what was embedded in it. What you're asking me is why we missed it and the question of why we missed it is all the different guesses at how costs are going to flow through at what the volumes are going to be.
Frank Boykin
The sales were not any better than what we had when we first give the guidance for March than where we ended up. I'll say that, if that was your question.
Dennis McGill - Zelman & Associates
And then I guess kind of along the same lines, can you give us some brackets on what your revenue is embedded in the second quarter guidance?
Frank Boykin
We normally don't give guidance beyond just the bottom line, but we're not anticipating any kind of top line improvement, I would say, from what we've seen from a run rate over the past quarter.
Jeff Lorberbaum
We expect to [inaudible] seasonal pieces.
Frank Boykin
Yes.
Jeff Lorberbaum
We don't expect to -
Frank Boykin
Yes, I'm talking year-over-year.
Jeff Lorberbaum
Don't expect any different changes seasonally as a general piece.
Operator
Your next question comes from [Barrett Eamon] - Brownstone Asset Management.
Barrett Eamon - Brownstone Asset Management
Just following up on that question, I guess you're saying you expect the trajectory of your top line to remain pretty similar on a year-over-year basis, so I'm just curious because your second quarter guidance is pretty good on the earnings side. Can you sort of identify the main drivers because you're implying that your margin will be flat year-over-year on the gross margin side.
So I'm kind of curious is it mostly raw materials cost savings? How exactly are you achieving that?
Frank Boykin
It's several things. It's one, as we go into, like we were saying, first quarter is seasonally low, second quarter better, so volume's going to be up, top line volume's going to be up from a seasonal standpoint.
Jeff Lorberbaum
As we defined this somewhere, 10% to 15% higher utilization rates.
Frank Boykin
Plus we'll be producing more in line with sales as opposed to the first quarter, where we were producing less than sales, so our overhead absorption numbers will be better. And as we've talked about, first quarter impact of raw materials versus second quarter impact of raw materials.
In the carpet business, the second quarter's going to be much more favorable. And then all of the cost-cutting things we're doing in the second quarter.
Barrett Eamon - Brownstone Asset Management
And do you expect that sort of trend to continue throughout the year then?
Frank Boykin
We would expect the results in the second quarter to be somewhat indicative of what we're going to see through the rest of the year.
Operator
Your next question comes from John Baugh - Stifel Nicolaus & Company, Inc..
John Baugh - Stifel Nicolaus & Company, Inc.
Three things real quick. Number one, would you be willing to give out the Encycle annual revenue run rate?
Number two, you talked about this asset-backed revolver. Is that something that's been done, heavily considered, likely to happen or just a possibility?
And number three, any color on the furniture and roofing segments of Unilin? What are they roughly in size and are they losing money?
Jeff Lorberbaum
Encycle revenues, asset-backed revolver and the Unilin furniture and roofing segments.
Frank Boykin
The Encycle since its introduction was a total of about $150 million in total and it went up and down and up. It started out and one peak it reached a peak and then we pulled it back down, but that's the total over the life of it.
The second question was on the ABL, John, really the point I was trying to make there is that there are a number of different financing alternatives available in the market now for us, one of which would be bonds in the long-term financing alternative, and then the other that we've looked at and talked to banks about - we haven't completed anything or concluded anything - is perhaps an asset-backed loan revolver alternative. So there's nothing concluded in any of those.
Jeff Lorberbaum
There was a third question which we didn't answer.
John Baugh - Stifel Nicolaus & Company, Inc.
The third question had to do with furniture and roofing. How big are they?
Are they making money?
Frank Boykin
I think what we've said there is that they represent -
Jeff Lorberbaum
We said it represents about - what number?
Frank Boykin
A third.
Jeff Lorberbaum
One-third of the [inaudible] business. It's made up of multiple pieces.
The biggest pieces in it are a board business and a roofing structure business. And what we've continued to say over the past six to nine months is that the board businesses are highly capital intense, that the pricing has gone from cyclical highs to cyclical lows and that we're at the cyclical low point, that the board parts are operating somewhere near cash cost or slightly better in the environment that they're in, but at an operating loss.
The roofing structure business is a regional business, of which we have, of the category within the geographies we play, about a 50% market share. The business held up until we got into the fourth quarter.
The fourth quarter it started slowing and in the first quarter it has continued to slow along with all other investments, marketing pieces there. In Europe the first quarter the weather was a little worse than what they expected, so some of the projects go put on hold.
So it should pick up some due to weather as it would normally do, but it was a little worse than normal in there.
Operator
At this time there are no further questions in the queue. Mr.
Lorberbaum, did you have any closing remarks?
Jeff Lorberbaum
This is a very difficult environment in which all companies are operating. We are making tough decisions to run our business for the long term.
We are cutting costs and infrastructure and, as we get through this on the other side, our cost structures and margins should be better as we come out and as the volume picks up. We appreciate everyone being with us and have a nice weekend.
Operator
This concludes today's conference call. You may now disconnect your line.