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Executives

Jeffrey S. Lorberbaum - Chairman and Chief Executive Officer

Frank H. Boykin - Chief Financial Officer and Vice President of Finance

Analysts

Stephen Kim - Barclays Capital, Research Division

Michael Jason Rehaut - JP Morgan Chase & Co, Research Division

Mike Wood - Macquarie Research

Kenneth R. Zener - KeyBanc Capital Markets Inc., Research Division

Daniel Oppenheim - Crédit Suisse AG, Research Division

Susan Maklari - UBS Investment Bank, Research Division

Dennis McGill - Zelman & Associates, LLC

Sam Darkatsh - Raymond James & Associates, Inc., Research Division

John A. Baugh - Stifel, Nicolaus & Co., Inc., Research Division

Keith B. Hughes - SunTrust Robinson Humphrey, Inc., Research Division

Desi DiPierro - RBC Capital Markets, LLC, Research Division

Mohawk Industries (MHK) Q1 2013 Earnings Call May 3, 2013 11:00 AM ET

Operator

Good morning. My name is Angela, and I will be your conference operator today. At this time, I would like to welcome everyone to the First Quarter 2013 Earnings Conference Call. [Operator Instructions] Thank you. Mr. Jeff Lorberbaum, Chairman and CEO of Mohawk Industries, you may begin.

Jeffrey S. Lorberbaum

Good morning, and thank you for joining our First Quarter 2013 Conference Call. Joining me on the call is Frank Boykin, our CFO, who will review our Safe Harbor statement and later our financial results.

Frank H. 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 form 8-K and press release in the Investor Information of our website for a reconciliation of any non-GAAP to GAAP amounts.

Jeff?

Jeffrey S. Lorberbaum

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

For the quarter, our sales increased 5.5% as reported or 5.4% on a constant exchange rates.

During the quarter, we generated adjusted EBITDA of $151 million and reduced SG&A by 90 basis points relative to sales across the enterprise even as we increased investment in growth areas of the business.

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

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

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

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

In the U.S., we're enhancing the manufacturing assets and processes to reduce cost and improve quality. In both the U.S. and Europe, our cost will improve as we manufacture much of the board requirements, limit manufacturing and impregnation requirements that Pergo is presently purchasing.

We've unified the organization by combining senior management teams, sales organizations, logistics systems and administrative functions. The manufacturing consolidation and administrative restructuring will eliminate about 140 positions across the business and will take up to a year to complete at an estimated cost of $35 million, less real estate sales of $10 million to $15 million in the future.

We anticipate all of our integration restructuring activities will enhance Pergo's opening margins to a level similar to Unilin's over the next several years.

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

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

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

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

In the faster growing Russian market, we continue to expand our unique approach as a manufacturer, distributor and retailer, focused on mid-to-high end market. Presently, we have the #1 position in the fragmented Russian market, where we own and franchise retail stores. We have direct control of about 50% of our sales all the way to the end customer, which builds strong brand awareness with retail advertising at the store level and ensures the superior consumer experience through our knowledgeable retail staff.

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

While we're in the early processes of going through, we estimate Marazzi's restructuring costs of $15 million to $20 million, which will be offset by real estate sales estimated to be about $10 million in the future. Our goal with these actions and longer-term improvements in the European economy is to expand the Marazzi operational margins up to the low to mid-teen range over the next several years. Acquisition costs for the Marazzi transition -- transaction will total approximately $14 million, including advisories, service, legal, tax and accounting fees.

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

Frank, would you please give our financial report?

Frank H. Boykin

Sure. Thank you, Jeff. Good morning, everyone. Sales for the first quarter were $1,487,000,000, increasing 5.5% over last year, driven by volume in Dal-Tile and Unilin and improving mix in the carpet business. Our gross margin was 25.4% as reported. The margin improved slightly, excluding nonrecurring items. We had better mix, higher productivity and increased volumes in the U.S. that offset the impact of a slower Europe.

SG&A dollars were $290 million, which was flat with last year, and 19.5% of net sales. And that compares to 20.4% of net sales last year. Better leverage with higher sales and amortization, which was lower by $10 million, positively impacted our SG&A.

Unilin amortization will be approximately $35 million lower in 2013 compared to last year.

Restructuring charges for the quarter were $10 million. This included $2 million in cost of goods and $5 million in SG&A for the Mohawk segment reduction in force, with the $3 million balance in Unilin SG&A related to the Pergo integration.

Full year restructuring is estimated at $35 million per Pergo integration cost and an additional $15 million to $20 million for Marazzi, $10 million of which was accrued in the first quarter by Marazzi. We expect to offset a portion of these costs with proceeds from future asset sales estimated at $20 million to $25 million.

Our operating income, excluding charges, was $97 million [ph] or a margin of 6.5%, which is up 140 basis points from last year.

Interest expense was $19 million compared to $22 million last year and was impacted favorably by lower rates this year. We are estimating interest in the future to be at $25 million per quarter.

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

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

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

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

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

In the Dal-Tile segment, sales were $412 million, up 5% from last year. The Dal-Tile sale service center and independent distributor channels grew, with the home centers lagging due to difficult comps from last year. The Mexican growth continued to be strong, with double-digit growth rates again this quarter in the local currency.

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

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

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

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

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

Marazzi will be owned for 9 months this year. Sales last year were $1.16 billion, and we experienced a 4% to 5% growth rate in the first quarter of this year, which is anticipated to be maintained throughout the year. The operating margin for Marazzi are estimated to be 10% to 11%.

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

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

And now we'll jump to the balance sheet. We ended the quarter with cash of $1,120,000,000. This is up due to the cash that was raised to finance the Marazzi acquisition, which closed in early April.

Receivables were $826 million. Our DSOs at 47 days were flat to last year. Receivables increased approximately $28 million due to the Pergo acquisition.

Inventories were $1,230,000,000. Our inventory days improved to 107 days from 109 days last year. The inventory increased at the end of the quarter about $48 million due to the Pergo acquisition.

Fixed assets of $1,730,000,000 include capital expenditures of $63 million during the quarter and depreciation and amortization of $60 million. The full year capital expenditures is estimated at $380 million, including Pergo, Marazzi and Spano.

Depreciation and amortization is estimated at $310 million for the full year, including each of the 3 acquisitions. Our full year run rate for D&A is estimated at $335 million.

Our long-term debt was $2.3 billion at the end of the quarter and included $600 million 10-year 3.85% bonds and a drawdown of $130 million of the bank revolver, both used to finance Marazzi in our April acquisition. We are currently paying interest at 2% on the revolver. Net debt to EBITDA was 1.7x at quarter end and would have been approximately 2.8x on a pro forma basis if Marazzi and Spano had been included.

Jeff?

Jeffrey S. Lorberbaum

Thank you, Frank. Mohawk sales were relatively flat during the first quarter with operating income rising 24%, excluding unusual charges. Carpet sales growth was partially offset by home center transitions that were completed in the first quarter and lower rug sales. Our SmartStrand and Wear-Dated soft carpets are growing and positively influencing our product mix and margins. Our sales in the specialty channel continue to show strength, and we expect improvement in the home center channel as sales of our new introductions gain traction in the second quarter.

We began implementing a 4% to 6% price increase during the period to offset our material cost changes. However, the timing of implementation will not cover an estimated $5 million to $10 million of those higher costs in the second quarter. We anticipate the price increases will align with our material costs in the third period. We implemented a freight increase for carpet to offset higher transportation cost.

Over the past several years, we simplified our business, improved our processes and implemented more automated systems, which allowed us to eliminate about 250 positions in management and administration at a cost of $6 million, which was expensed in the quarter.

During the period, we built upon the success of our revolutionarily SmartStrand Silk collection by adding 12 products that combined silk's unsurpassed softness with contemporary styling. Consumer response has been enthusiastic to our Wear-Dated Embrace luxurious softness and exceptional durability, easy care and attractive price point for premium product. We're further expanding the soft category by introducing Wear-Dated value products made with our recycled polyester with a compelling environmental proposition.

As the differentiated super soft products expand, we anticipate the category will represent a larger share of our carpet sales and further improve our product mix. We are increasing extrusion capacity throughout the year to satisfy the increased demand for these products.

Sales of hardwood and ceramic in our Mohawk segment improved with new introductions, such as our ArmorMax hardwood that offers unsurpassed wear and scratch resistance, and ceramic tile with the Reveal Imaging that replicates the rich look of wood and stone surfaces. During the period, we announced a third price increase of 10% on our hardwood products to offset rising lumber costs.

In the commercial category, our hospitality sales continued solid as we expanded our customer base and as hotels increased their renovation of their public spaces. Our exclusive Duracolor commercial broadloom and tile products expanded due to their exceptional styling, superior stain and soil resistance and improved value.

We introduced the new modular floating tile installation system and a new eco-comfort pad, which is made of 90% post-consumer recycled content that increases the life of our carpets.

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

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

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

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

In the home center channel, we added new sizes, updated our floor tile options and added fashionable mosaics to complement existing lines.

In our Dal-Tile brand, we added sales representatives to target new residential construction, expanding our regional builder business.

To grow our American Unilin brand, we've added representatives focused on commercial specifications in the multifamily segment.

Commercial sales grew in the restaurant, retail and hospitality channels, with large projects utilizing high-fashion design, contemporary sizes and sophisticated colors.

To provide appealing premium options to the design community, we introduced innovative collections that replicate limestone, a valued price porcelain with dual-layer construction and a commercial product that blends recycled porcelain and marble chips and earns lead points.

In Mexico, we continue to grow faster than the market by aggressively pursuing new construction projects, adding distributors, improving product mix and expanding our penetration of home centers. Our Salamanca facility volume efficiencies and yields continue to improve according to our plan. At our Monterrey facility, we added Reveal Imaging capability to both our wall and trim production.

To offset cost increases, we announced a price increase of about 3% for tile in Mexico that will be fully implemented in April.

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

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

Margins improved from increased U.S. volume and lower amortization costs, offset by volume, lower mix and material inflation in Europe, excluding acquisitions.

We increased our laminate distribution to new markets, such as Ukraine, and initiated promotional actions within established European retailer channels. Our new laminate lines in Europe are being well accepted with collections that offer the look of natural wood in contemporary colors, as well as long-wide planks resembling custom wood floors.

Our engineered wood products with brush surfaces offer fashionable visuals at affordable price points.

Our Livyn luxury tile line collection is gaining traction across Western Europe, differentiated by our Quick-Step brand industry-leading realism and an advanced click installation system.

In North America, our laminate wood flooring sales increased across all channels. Laminate flooring sales were enhanced by introductions with realistic wood visuals and wide planks. Our wood floor products are growing with performance features, such as Scotchgard and ArmorMax protection that provide easy maintenance and industry-leading wear resistance, new products with scraped surfaces and fashionable distressed looks. To offset rising lumber costs, we announced another price increase of 10% for wood flooring that will be effective in late May.

Sales of our installation (sic) [insulation] boards continue to grow with an expanded product offering and increased geographical penetration in France and Germany. Construction of our new insulation board plant in France is ahead of schedule, with production anticipated to begin in the third quarter.

In the period, inclement weather conditions further hampered the difficult economic environment affecting Western European housing construction and reduced our roof panel sales. Earlier this year, we consolidated our roofing sales organization and we'll consolidate our 2 roofing plants in the second quarter while maintaining the ability to respond to a future rebound.

During the period, retailers at the industries largest U.S. trade show voted Mohawk brands as having the best new products in most flooring categories, including carpet, ceramic tile, laminate and area rugs.

Training magazine placed Mohawk 8th in their national ranking, and Mohawk was the only manufacturing company in the top 10 for the second consecutive year.

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

We remain optimistic about the long-term prospects of our international business even while challenges persist in some regional economies. In each of these regions, we have leading market positions, highly recognized brands, outstanding distribution channels and efficient manufacturing that will benefit our results as those economies improve.

We anticipate each of our acquisitions contributing to our sales and earnings this year as we implement strategies to maximize their potential.

With these factors, our guidance for the second quarter earnings is $1.58 to $1.67 per share, excluding any restructuring or acquisition costs.

Our focus in 2013 remains on creating differentiated products with an appealing value proposition and successfully integrating our recent acquisitions. For 2 decades, we have created significant shareholder value, having a dual strategy of growing our established businesses while enhancing performance of acquired companies.

We have an experienced management team with the resources and talent to execute these strategies. Regardless of the pace in the recovery, we remain committed to driving innovation, operational excellence and geographic expansion to optimize our business.

Finally, in connection with our recent acquisitions, we are changing the names of our segments to refer to product categories rather than historical brands. Going forward, the Mohawk segment will be known as the Carpet segment, the Dal-Tile segment will be known as the Ceramic segment, the Unilin segment will be known as Laminate and Wood segment.

This will not change either the brand or sales strategies that we utilized today.

With that, we'll be glad to take questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from Stephen Kim.

Stephen Kim - Barclays Capital, Research Division

I wanted to talk to you about your current balance sheet and acquisitions in that context. It seems that you have a net EBITDA debt -- net debt to EBITDA below -- well below 2. It seems you have some room to either do buybacks or possibly additional acquisitions. I was just wondering how you see the balance between these 2 options given -- in particular, trying to understand, do you have the capacity right now operationally to absorb any additional acquisitions in the next 6 to 12 months.

Jeffrey S. Lorberbaum

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

Stephen Kim - Barclays Capital, Research Division

Oh, it will. Okay.

Jeffrey S. Lorberbaum

Yes, yes. So the answer -- the short answer is, we're really going to focus on paying down debt and integrating the acquisitions.

Stephen Kim - Barclays Capital, Research Division

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

Frank H. Boykin

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

Operator

Your next question comes from Michael Rehaut with JPMorgan.

Michael Jason Rehaut - JP Morgan Chase & Co, Research Division

First question, just wanted to clarify also around the acquisitions. In response to Steve's question, the operating margins, is that going to -- I don't know if you exactly answered Steve, if it's going to the Unilin overall corporate average or the above average laminate business. And also, in the estimates that you have for at least 2Q '13, I would assume that it doesn't include any of the payback on the restructuring.

Jeffrey S. Lorberbaum

Well, I'll answer the last question first. The estimates we have for next quarter -- and we've got these 3 acquisitions and a lot of moving parts, right, in each of the 3 acquisitions, so it does include some of the savings that we're going to get from some of the integration that we've already completed. But we still got a good bit more to do. What was the first question?

Frank H. Boykin

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

Michael Jason Rehaut - JP Morgan Chase & Co, Research Division

Okay, great. And I guess, second question on the Mohawk carpet segment, you pointed to still lagging inflation in the second quarter. I guess really kind of 2 parts because I think it would be helpful to understand what's going on in the Mohawk segment. On the top line, can you give us a sense of how much the product transitions negatively impacted overall top line growth, number one? And number two, I would assume some of that would come back. And with that coming back in 2Q, would you still expect a year-over-year margin expansion even with the cost inflation lag?

Frank H. Boykin

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

Jeffrey S. Lorberbaum

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

Michael Jason Rehaut - JP Morgan Chase & Co, Research Division

That's on the year-over-year you're talking about?

Jeffrey S. Lorberbaum

Correct.

Operator

Your next question comes from Mike Wood with Maguire (sic) [Macquarie].

Mike Wood - Macquarie Research

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

Frank H. Boykin

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

Jeffrey S. Lorberbaum

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

Frank H. Boykin

The construction -- anything related to construction.

Jeffrey S. Lorberbaum

Yes. In laminate less so.

Mike Wood - Macquarie Research

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

Jeffrey S. Lorberbaum

If you look at the different categories, we are increasing our sales of higher value products, which we call all the soft products under multiple different brands. And we think we're changing the premium market in carpets, so that's helping our margins. We are continuing to reduce the sales of our old staple products and are headed to close to 0 over this year. We get through -- there's some of those legacy left. There's a transition away from polypropylene products that going on and replacing those is growth in the polyester business. Polyester is basically selling in the mid to low-end part of the marketplace as when people go above there, they prefer to have the extra benefits of the higher-value nylon and some extra products that we sell. I guess some of the other margin things that are going on at the midpart point of the market is not growing as much as it should be because of the replacement business. So we expect that business to pick up as it goes through until you have higher growth in our business at the lower end and at the higher end.

Operator

Your next question comes from Ken Zener with KeyBanc Capital.

Kenneth R. Zener - KeyBanc Capital Markets Inc., Research Division

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

Jeffrey S. Lorberbaum

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

Kenneth R. Zener - KeyBanc Capital Markets Inc., Research Division

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

Jeffrey S. Lorberbaum

Hospitality has been strong in both carpet and in tile, and we've seen strength in health care as well.

Frank H. Boykin

And some of the commercial categories are doing better [indiscernible] I'm sorry.

Kenneth R. Zener - KeyBanc Capital Markets Inc., Research Division

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

Frank H. Boykin

Ken, that's our best estimate. We've further along on the Pergo acquisition because we've obviously had it longer. And then Marazzi and Spano, those are our estimates that we're hopeful that we're fairly close.

Kenneth R. Zener - KeyBanc Capital Markets Inc., Research Division

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

Frank H. Boykin

Well, just like with the legacy Mohawk business, it experiences the same kind of seasonality. First quarter is going to be the slowest in each of those 3 businesses.

Jeffrey S. Lorberbaum

The only difference would be there European business. In August, it's slower where the U.S. businesses are.

Frank H. Boykin

Yes, because of the holiday season here.

Operator

Your next question comes from Dan Oppenheim with Credit Suisse.

Daniel Oppenheim - Crédit Suisse AG, Research Division

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

Jeffrey S. Lorberbaum

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

Daniel Oppenheim - Crédit Suisse AG, Research Division

Okay. And then secondly, within the ceramics business then, you talked about sort of the distribution with Marazzi in Russia in terms of owning the retail and controlling that distribution. What are your thoughts on that more broadly? Is there -- as you look at that, is there any thought in terms of just more of that activity in terms of control and distribution through retail?

Jeffrey S. Lorberbaum

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

Operator

Your next question comes from David Goldberg with UBS.

Susan Maklari - UBS Investment Bank, Research Division

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

Jeffrey S. Lorberbaum

The answer is the product introductions had different margins based on the value-added difference. And as you go up in the higher end of the spectrum, there's more differentiation. As you go down in the bottom end of it, you have commodity products with very limited differentiation. When we introduce products, we try to introduce products that have higher margins than the products we sold before and replace old dropping products with better margins as we go every year. We attempt to introduce products to cover the raw material costs that are there so that we don't have to raise them, but it doesn't always work out that way.

Susan Maklari - UBS Investment Bank, Research Division

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

Jeffrey S. Lorberbaum

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

Susan Maklari - UBS Investment Bank, Research Division

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

Jeffrey S. Lorberbaum

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

Operator

Your next question comes from Dennis McGill with Zelman & Associates.

Dennis McGill - Zelman & Associates, LLC

Could you guys talk a little about the, I think you said, 4% to 5% for Marazzi in the quarter? Can you just talk that a little bit geography by geography and what you're seeing across the 3 major regions?

Jeffrey S. Lorberbaum

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

Dennis McGill - Zelman & Associates, LLC

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

Jeffrey S. Lorberbaum

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

Dennis McGill - Zelman & Associates, LLC

Okay. And then separately, on the Mohawk segment, the carpet business, how do you guys think about sort of what a good outlook would look like in a recovery scenario? There's been a lot of different timing issues related with some of the home center rollout, the mix, the rugs, maybe a lack of home improvement growth trailing some of the other industries out there. Where do you see kind of the volumes going once some of the stuff normalizes outage? As you look out over the next couple of years, what would you consider to be a strong recovery-type scenario in that category?

Jeffrey S. Lorberbaum

You have to start out with an estimate of what's going to happen with the entire flooring industry. If you assume -- it depends on how long a time period. If you assume about a 5% increase, what you'll have is the carpet piece should be below there on average over the period, and the things that are growing faster, such as ceramic, will be higher. Now a lot of it also depends on the mix in category. So ceramic has a much higher percentage of its business in new construction, for example, and the carpet side has a much higher percentage in remodeling. Then you have different amounts going into commercial. But I mean, in general, I think that as you see a 3% growth rate -- 3%, 4% growth rate in carpet over X time, while you have a 5% in the industry would be a good growth rate.

Frank H. Boykin

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

Dennis McGill - Zelman & Associates, LLC

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

Jeffrey S. Lorberbaum

It depends what you're calling recovery. Are you calling recovery in the next 12 months or the next 5 years?

Dennis McGill - Zelman & Associates, LLC

Let's say the next 2 years?

Jeffrey S. Lorberbaum

The next 2 years, then you've got to decide what the average growth of the industry is going to be so...

Dennis McGill - Zelman & Associates, LLC

To your point in carpet, carpet will under-grow the flooring category overall?

Jeffrey S. Lorberbaum

It will. So I mean if we fix 6% or 7%, it will go up with it.

Operator

Your next question comes from Sam Darkatsh with Raymond James.

Sam Darkatsh - Raymond James & Associates, Inc., Research Division

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

Frank H. Boykin

It was not a negative impact in Q1. It impacted us because we're buying in Q1, and it's hitting our P&L in Q2. So it was the raw material we're buying in Q1 that we're talking about.

Sam Darkatsh - Raymond James & Associates, Inc., Research Division

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

Frank H. Boykin

Correct.

Sam Darkatsh - Raymond James & Associates, Inc., Research Division

Okay. And next question, you're renaming the Mohawk segment the Carpet segment. Remind us, generally speaking, how much of that segment at this point is actually carpet versus other things, like textiles and rugs and pads and hardwood surface, that kind of thing.

Jeffrey S. Lorberbaum

The majority of it, carpet.

Sam Darkatsh - Raymond James & Associates, Inc., Research Division

2/3 or 3/4, how do we gauge that?

Jeffrey S. Lorberbaum

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

Sam Darkatsh - Raymond James & Associates, Inc., Research Division

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

Jeffrey S. Lorberbaum

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

Operator

Your next question comes from Stephen Maguire [ph] with Longbow Research [ph].

Unknown Anallyst

I guess the question is somewhat hypothetical in nature. I mean, you've got an awful lot of irons in the fire here. You're investing in people, you're investing in new products, you're ramping plants in Mexico and France, the list goes on and on and on. You've put up a 6.5% EBIT margin for the first quarter. Any sense of what that margin would have been if you were to exclude all these investments that you're making?

Jeffrey S. Lorberbaum

No, they all get intertwined together.

Unknown Anallyst

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

Frank H. Boykin

Yes. But I mean, we do that internally, but we're not prepared to talk about specifics at that level of detail.

Unknown Anallyst

Okay. Maybe if I -- in that case, let me just ask you about the French new insulation board plant. What do you think that would support in terms of incremental revenues at full capacity?

Jeffrey S. Lorberbaum

Probably about EUR 100 million.

Unknown Anallyst

About EUR 100 million? Okay, terrific.

Operator

Your next question comes from John Baugh with Stifel, Nicolaus.

John A. Baugh - Stifel, Nicolaus & Co., Inc., Research Division

I wanted to dive into the Mohawk segment and I guess just better understand the moving parts there. So everything being equal, we have 1.5% less volume just because of the short day, do I understand that correct?

Frank H. Boykin

Yes, that's correct.

John A. Baugh - Stifel, Nicolaus & Co., Inc., Research Division

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

Jeffrey S. Lorberbaum

The volume probably would be flat to up slightly.

John A. Baugh - Stifel, Nicolaus & Co., Inc., Research Division

With adding back the 1.5%?

Jeffrey S. Lorberbaum

Across all the pieces.

John A. Baugh - Stifel, Nicolaus & Co., Inc., Research Division

Okay. And then what -- we've heard referred about rug sales being slow for quite some time now and the home center issue. I guess, we're going to start lapping that. When do we lap that and maybe some more color on precisely what's going on in rugs?

Jeffrey S. Lorberbaum

The home center by the end of this -- by the end of the first quarter with the new introductions in, then we should start seeing improvement in the home center piece. The rug piece, we continue to see by the retailers a focus on reduction of lower price points. So what happens is the unit prices continued to decline as they keep pushing down the mix within the retail stores of what they want to advertise. So with that, the carpet sales have gone down with the reduction -- or the rug sales have gone down with the reduction of the selling prices, as well as the demand in those things have also been reduced. We have continued to reduce our cost structures and are maintaining our profit levels as that happens. At the same time, we are focused on growing various channels within it. There's a specialty retail channel that we think is growing and can then improve our mix, which we're planning on doing this year. E-commerce continues to grow, and we're trying to drive more fashionable higher-value rugs to improve the mix.

Operator

Your next question comes from Keith Hughes with SunTrust.

Keith B. Hughes - SunTrust Robinson Humphrey, Inc., Research Division

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

Jeffrey S. Lorberbaum

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

Keith B. Hughes - SunTrust Robinson Humphrey, Inc., Research Division

And the last several quarters, you've done a little below for a lot of reasons that you've mentioned several times. Are we just anniversary-ing some of those problems or is it something else?

Jeffrey S. Lorberbaum

I think we're improving our position.

Keith B. Hughes - SunTrust Robinson Humphrey, Inc., Research Division

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

Frank H. Boykin

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

Operator

Your last question comes from Robert Wetenhall with RBC Capital Markets.

Desi DiPierro - RBC Capital Markets, LLC, Research Division

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

Frank H. Boykin

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

Jeffrey S. Lorberbaum

I think you have to answer in 2 pieces. Because one of the legacy businesses, we expect the percent cost of sales to continue going down as we manage the cost. The businesses coming in, we're homogenizing those costs, we're taking costs out. But many of them are above where we are, so there's really 2 different answers.

Desi DiPierro - RBC Capital Markets, LLC, Research Division

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

Jeffrey S. Lorberbaum

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

Operator

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

Jeffrey S. Lorberbaum

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

Thank you very much for joining us.

Operator

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

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