莫霍克工業集團 (MHK) 2013 Q2 法說會逐字稿

Good morning. My name is Shelby and I will be your conference operator today. At this time, I would like to welcome everyone to the Mohawk Industries 2013 second-quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. (Operator Instructions). As a reminder, ladies and gentlemen, this conference is being recorded today, August 2, 2013. Thank you.

I would now like to introduce Mr. Frank Boykin, Chief Financial Officer. Mr. Boykin, you may begin your conference.

Thank you, Shelby. Good morning, everyone, and welcome to the Mohawk Industries quarterly investor call. We are pleased to be here today to provide an update on our progress during the second quarter of 2013 and guidance for the third quarter.

I would like to remind everyone that our press release and statements we make on this call may include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995, which are subject to various risks and uncertainties including but not limited to those set forth in our press release and our periodic filings with the Securities and Exchange Commission.

This call may include a discussion of non-GAAP numbers. You can refer to our Form 8-K and press release in the investor information section of our website for a reconciliation of any non-GAAP to GAAP amounts.

I will now turn the call over to Jeff Lorberbaum, Mohawk's Chairman and Chief Executive Officer. Jeff?

Thank you, Frank, and thanks to everyone for joining us.

During today's call, I will review our second-quarter highlights, assess market conditions, and later discuss our third-quarter guidance.

The US flooring industry continues to improve with new residential construction up significantly for the year, remodeling gaining strength, and commercial construction continuing to grow. Mohawk is the world's largest flooring manufacturer and our second quarter was the most successful in our history. We had strong revenue and profit growth as both our legacy business and recent acquisitions delivered strong performances that exceeded our expectations.

Our earnings per share were $1.16 as reported or $1.84 excluding unusual charges, an increase of 61% over adjusted 2012, our best second quarter on record. For the quarter, our sales increased about 35% as reported or 34% on a constant exchange rate, supported by 6% growth in our legacy sales and the balance from our recent acquisitions.

Our adjusted SG&A improved 110 basis points as we continued to control our costs. Our adjusted operating income increased 9.8%, an improvement of 190 basis points.

In the first half of the year, we invested approximately $1.85 billion in three acquisitions, Pergo, Marazzi, and Spano, which were financed advantageously with 10-year bonds at 3.85% and low-cost short-term debt. Our second-quarter results affirmed our strategy of acquiring complementary companies that we can leverage with our existing business to facilitate market expansion and increase our profits.

During the period, we made significant progress in integrating our new acquisitions including realigning organizations, consolidating plants, reducing cost structures, relocating production and assets, and enhancing our product offerings. We are also pleased to be recognized in the US as the Flooring Manufacturer of the Year by industry retailers and commercial customers in a survey conducted by a leading trade publication.

Our second-quarter performance reflected our ability to execute our growth strategy along with signs of an improving US economy. The housing sector is seen as a leading component of the US economic improvement this year. The National Association of Home Builders forecast 955,000 new home starts in 2013 with expectations of continued improvement through 2014 as new home construction returns to its historical averages.

Harvard's LIRA Index, which measures remodeling investment, forecasts significantly higher residential remodeling for the remainder of the year. The June's Architectural Billing Index, a leading indicator of nonresidential construction, remained positive indicating a steady demand for commercial construction. Commercial loan originations are up almost 10% over 2012, reinforcing a positive future outlook.

In our other markets, Mohawk is poised to become the world's 10th largest economy this year even as the country's pace of growth has somewhat slowed. Russia's Economic Minister in his mid-July statement expected new monetary policies to improve growth in the back half of this year. The European market remains soft, with Northern Europe outperforming the Southern part of the continent.

These overall economic conditions mirrored Mohawk's second-quarter performance. Our legacy North American sales were up 8% while the balance was down slightly due to weaknesses in Europe.

As a reminder, before I review our segment performance, we revised our segment names to reflect our larger and more complex business. As I review the three segments, note that our Carpet segment was formerly referred to as the Mohawk segment. Our Carpet segment was previously called the Daltile segment. Our Laminate and Wood segment was identified as the Unilin segment.

Our Carpet segment second-quarter sales increased 5% over 2012 with Carpet sales outperforming rugs. Sales rose to their highest level in more than four years due to improving residential new construction and remodeling, continued commercial growth, and improved rug sales. Our operating margins expanded 100 basis points as higher volume, improved sales, along with greater manufacturing and SG&A efficiencies offset material costs.

Rug sales improved with a focus on new distribution channels and product categories. During the period, carpet price increases were implemented but lagged raw material inflation by approximately $6 million, as we anticipated, and will align with our costs during the third quarter.

In residential, sales in the specialty channel showed substantial growth while our home center business improved with the completion of our product transactions during the period. The momentum of our next generation soft products remains strong and during the period we extended our soft technology into polyester fiber with the launch of our EverStrand Soft Appeal collection. These new products, along with our SmartStand silk and Wear-Dated Embrace extend Mohawk's leading position and provide our customers with three distinct value-added propositions.

We are also introducing a new attractively priced polyester collection under the Image brand targeting retailers that stock carpet in their stores.

In commercial, corporate hospitality, retail, and healthcare, continue to outperform the other channels. We are aggressively expanding our Duracolor commercial carpet collection, made from Mohawk's premium fibers, which provide a greater value to our customers and unparalleled performance.

Our carpet tile sales continue to grow, outpacing our commercial broadloom during the quarter. We are currently benefiting from the many strategies we have executed over the past few years, resulting in enhanced product innovation, reduced manufacturing complexity, improved operational efficiencies, lower cost materials, and higher yields.

We continue to improve our quality performance and service level as well as reduce our administrative costs. We are installing additional extrusion and yarn assets to support continued growth and enhance our cost position.

Revenues for the Ceramics segment have almost doubled with our Marazzi acquisition compared to the prior year and they are now comparable to our Carpet segment. Operating margins have expanded 260 basis points due to improvements in both our legacy business and Marazzi.

Our North American sales were up in the low teens, including both our Mohawk and Marazzi brands and our Mexican business. Residential growth in the period was driven by new construction improved remodeling outpacing our commercial business. We have launched a new builder collection to enhance our product selections for large homebuilders.

We see signs of continued growth in residential remodeling in both our specialty and home center channels. We announced a 2% to 4% price increase in Ceramics effective in August to offset higher energy, transportation, and other costs we've been encouraging.

Our statements retail Ceramic program continues to gain momentum, with commitments for about 140 boutique shops that improve the sales and margins of our retailers. Sales of our ceramic planks that reasonable natural wood are growing dramatically. We are in the process of increasing our production of plank tiles to support their continued growth. Our American Olean and Marazzi brands complement each other and we will market them together to provide a complete line of residential floor, wall tile, and commercial tile.

Additionally in Las Vegas, where we lack strong independent distribution, we're testing distributing both brands in a single service center. We anticipate these actions will enable us to maximize the market position of all our brands.

Our strong commercial sales organization and comprehensive product offering are expanding our specifications to large national hospitality retail and other commercial accounts.

We have reorganized our US Ceramic management to operate the US and Marazzi and Daltile business as a single company, reporting to our North American Ceramic President. We have realigned our organization to leverage our sales, product development, manufacturing, logistics organizations. We are beginning to import products from Marazzi Italy to replace ceramic purchases from other manufacturers.

Our business is benefiting from sharing best practices between Daltile and Marazzi that will result in many improvements going forward.

In Mexico, our new plant continues to improve its productivity, quality, and costs. We have expanded our customer base as well as our product line. Our sales mix is improving as we transition to higher value products from promotional offerings used to start up the facility. Our Mexican sales have increased as we anticipated and our margins have expanded as our sales mix and costs have improved.

We have initiated new capital investments to expand our North American wall and floor tile production to support our continued growth.

Our Russian Ceramic business continues to perform well with double-digit sales growth and leading Ceramic margins. The Russian industry has slowed with the economy, resulting in more promotional activity in the market. Our integrated distribution model is increasing sales to the stronger new construction market, offsetting the less robust remodeling market.

Our new 2013 product collections are outperforming our expectations, with plank tiles featuring a wood look expanding at a rapid pace similar to North America.

We have increased our advertising budgets to support our brand strategy and growth in major markets in Russia. Our productivity and logistic costs are improving, with more automated equipment and enhanced processes. Our market penetration is growing as a result of our new product introductions and the addition of more franchised stores.

To support our continued growth in the Russian market, two new production lines will begin operation by the end of the third quarter.

Our European Ceramic sales were up slightly with expansion in Northern Europe and exports to other markets offsetting soft conditions in Southern Europe. We've implemented a new European organization which is executing significant sales and operational improvements.

We've changed the organization structure to manage as a single European business rather than the historical country-by-country basis. We have reduced the infrastructure to improve our costs, reduce manufacturing, restructure manufacturing into a unified operation, realigned the sales organization to offer our entire productline to all customers and are expanding our premium product offering.

We have completed an analysis of our product line and are introducing more decorative, larger sized tiles while rationalizing underperforming SKUs. New products are being manufactured for Daltile to introduce into the US market. New investments and equipment are being made in Europe to lower our costs and further enhance our capabilities.

In the Ceramic segment, we are leveraging the best practices and knowledge of all our operations across the enterprise to enhance our product development, supply chain management, productivity, distribution, and marketing strategies.

Sales in our Laminate and Wood segment were up 33% over last year, with the majority of the increase coming from our acquisitions of Pergo and Spano. Operating margins excluding unusual one-time charges were 13%, with significant improvements in North America and acquisitions offsetting weakness in the European markets.

Our legacy North American sales were up double digits with strong growth in residential new construction and home centers. With the addition of Pergo, we now have a leading position in both the North American specialty retail and home center channels and lead the premium laminate category with the best brand and differentiated products.

We have integrated the management teams of our US Unilin and Pergo businesses so we are operating as a single entity. We have reduced SG&A expenses, consolidated administrative functions, increased manufacturing productivity, and eliminated redundancies. We've increased the output of the North American Pergo production lines and started up a mothballed Unilin laminate line.

We are in-sourcing paper impregnation, maintenance, and some board requirements, which Pergo is outsourcing. We are manufacturing Unilin's laminate accessories in the Pergo molding plant, and we are leveraging our Company's freight and distribution capabilities to improve efficiencies.

Our Malaysian Wood business, Australian distribution, and Russian operations continued to improve while our European business continues to face headwinds with our legacy sales down slightly and margins under pressure. The Pergo integration in Europe is also well underway and will create significant synergies.

We will be expanding Pergo's distribution in both residential and commercial with a focus on the brand's higher durability and performance features. We have begun manufacturing Pergo-branded products in our Belgian and Malaysian factories. We are in the process of closing both of the Pergo manufacturing plants in Sweden. This will allow us to enhance the product offering with new technology and substantially improve Pergo's profitability.

The production will be entirely moved in the third quarter and new collections are being produced to update the European Pergo productline this year. We will maintain local warehousing in Sweden to ensure industry-leading service in the region.

European energy and conservation policies continue to drive our insulation board growth. In addition, our polyurethane composition has enhanced thermal properties that is gaining share from other types of insulation. Our new insulation plant in France will begin production in the third quarter, expanding our capacity and geographic reach.

Our roof panel sales are lower along with the decline in new construction in the Netherlands and France. The consolidation of our two roofing plants in Netherlands will be completed in the third quarter to improve our costs. Our legacy board sales were flat with margins down somewhat in the period. The market continues to be difficult and we are adjusting to the economic environment.

We closed the acquisition of Spano during the period and have identified many opportunities for synergies. We have restructured the management and sales organization of the board operations. This will help us expand the product offering and distribution, optimize manufacturing assets, and reduce infrastructure costs. We anticipate maximizing the use of the best assets, reducing manufacturing complexity, eliminating product movements, and replacing inefficient assets to further improve both the productivity and our cost position.

I will now turn the call over to Frank to review our financial performance for the period.

Thank you, Jeff. Net sales for the quarter were $1.976 billion, up approximately 35% as reported or 34% on a constant exchange rate basis and include an incremental $416 million from our acquisitions.

Legacy sales for the quarter were up 6% compared to last year. In the US, new residential, residential remodel, and commercial all grew while Europe remained slow. The performance of our acquisitions exceeded our expectations in the quarter.

Our gross margin as reported was 26%. However excluding charges, the margin was 27.7%, up 80 basis points due to higher volumes, better mix, cost initiatives, and our acquisitions. Our SG&A for the quarter was $381 million or 19.3% of sales. Excluding charges, it was 17.9% of sales and improved 110 basis points from cost reductions, better leverage, and lower Unilin amortization of $10 million.

Our restructuring charges for the quarter were $60 million. Total restructuring and acquisition costs are estimated to be $120 million for the full year, of which $45 million to $65 million is expected to be recovered from future real estate sales over time.

In the second quarter, the $60 million of restructuring and acquisition costs that were incurred include $42 million for Marazzi, $15 million for Pergo, and $2 million for Spano with $1 million in other categories. The $60 million was comprised of $14 million for legal, accounting, and banking fees, a non-cash $19 million charge for the inventory step up, and $27 million for restructuring, primarily related to the Marazzi reduction in force and the Pergo plant closures and related relocation.

In the second half of 2013, we estimate that $50 million balance of restructuring charges will include an additional $14 million for a non-cash inventory step up and the rest will be for plant and infrastructure consolidation, product changes, and system conversions, which are being finalized.

Operating income excluding charges was $193 million, with a margin of 9.8%. Operating income dollars are up 66% from last year with our margin improving 190 basis points. EBITDA excluding charges for the quarter was $275 million with a margin of 13.9% or a 120 basis point improvement.

Interest expense grew to $25 million with our increase in debt from the acquisitions. Our income tax rate was 21% compared to 18% last year and for the full year, we expect a rate of 20%.

We had a loss from discontinued operations, which was $1.4 million for the quarter or $0.02 per share. This includes a loss from the operations of a non-core Marazzi sanitary ware business held for sale. Our earnings per share excluding charges was $1.84 and is up 61% over last year.

If we move to the segments, in the Carpet segment, our sales were $771 million, an increase of 5% over last year. We had volume increases in all of our end markets with improvement also driven by price increases and mix. Our operating income in the segment was $55 million or 7.1% of sales. This is an increase of 100 basis points and related to volume increases and mix improvement.

In the Ceramic segment, sales were $760 million. This was an 88% increase over last year. The increase was driven by the Marazzi acquisition and volume increases in our legacy business. Marazzi contributed $310 million to sales in the quarter. New residential, remodel, and commercial all grew over last year.

Operating income excluding charges was $88 million or a margin of 11.6%. Operating income dollars were up 144% over last year. Our margin improved 260 basis points. The Marazzi acquisition volume improvement and cost savings all contributed to the margin growth.

The Marazzi results will be included in Mohawk for only nine months in 2013. Their full-year sales last year were $1.160 billion and we expect a 4% to 5% growth rate in 2013 with a margin of 10% to 11%.

In the Laminate segment, sales were $471 million or a 33% improvement over last year. Acquisitions and North American growth offset a slower European business. Acquisitions in the quarter contributed $105 million to our sales.

Operating income excluding charges was $59 million with a margin of 12.6%. The operating income dollars were up 44%, with lower volumes and mix improvement in Europe offset by higher volumes in North America as well as earnings from our acquisitions.

Pergo and Spano sales were $500 million combined last year after excluding discontinued raw material sales and products previously dropped. Both are expected to be down in 2013 due to a slower European economy. Pergo will be owned for the full year and Spano for eight months, with combined margins estimated at 7% to 8% this year.

In the corporate and elimination segment, we had an operating loss of $9 million. We are expecting the full-year loss to be in the range of $25 million to $30 million this year with the intercompany profit eliminations impacting us more as we grow our topline.

On the balance sheet, receivables ended the quarter at $1.146 billion. This includes $300 million of an increase from acquisitions.

Our days sales outstanding were flat to last year at 47 days. Inventories at the end of the quarter were $1.592 billion. $410 million of the increase in inventories came from acquisitions. Our days inventory outstanding were flat to last year at 106 days.

Fixed assets at the end of the quarter were $2.594 billion and included capital expenditures of $83 million during the quarter, with depreciation and amortization of $81 million. We continue to anticipate full-year capital expenditures of $380 million and depreciation and amortization of $315 million.

Total long-term debt was $2.5 billion. Total net debt at the end of the quarter was $2.4 billion and that compares to net debt on a pro forma basis at the end of the first quarter of $2.5 billion. Our net debt to EBITDA improved to 2.6 times compared to 2.8 times at the end of the first quarter on a pro forma basis. Cash flow from operations in the quarter was $153 million with free cash flow of $70 million in the period.

I will turn the call back over to Jeff.

Thank you, Frank. Our performance during the second quarter underscored the value of our recent acquisitions and our ability to integrate them into our business. Our talented management team is focused on driving our historical businesses while optimizing our new acquisitions. We have quickly identified and executed many significant changes during -- including new organizational structures, cost improvement, asset consolidations, realignment of marketing strategies, and the enhancement of our product offering.

We continue to make the necessary strategy changes in investments to improve our profitability. We are committed to bringing innovation to the marketplace in all our products and our new acquisitions have enhanced our ability to realize this. We anticipate improving each of our product categories with our strong brands, efficient manufacturing, innovative products, and broad distribution.

We are increasingly confident in the continued strengthening of the US market and we believe that continued job growth, expanded new-home construction, and greater remodeling investments along with our new acquisitions will improve our future results.

With these factors, our guidance for the third quarter is $1.81 to $1.91 per share excluding any restructuring or acquisition costs. With business improvement and acquisitions in 2013, we anticipate the fourth-quarter seasonal decline to be slightly more than in 2010 and 2011.

Our second-quarter result demonstrate our ability to grow our legacy businesses while delivering positive results through acquisitions. Mohawk is a global business with the knowledge and expertise to effectively compete in local markets while satisfying regional trends.

While Mohawk's products and geographic presence have dramatically broadened over the years, the constant that remains is our commitment to operational excellence, continuous innovation, and the satisfaction of our customers.

We will now be glad to take questions.

(Operator Instructions). John Baugh.

Thank you and good morning. I wanted to inquire on the acquisitions -- where you think you are in terms of timing of executing the full realization of synergies and if you could do that by the three acquisitions. Then whether or not any of the three opportunities on the synergy front are perhaps greater than when you first acquired or analyzed the business? Thank you.

With the new acquisitions, we expect over the next few years to be able to improve the operating margins by about 2% to 4%. In addition, we believe there will be revenue growth which should continue. We made significant progress in the integration. Some of the pieces are in our control and some aren't. Some of the things that we intend to do include putting new assets in that could take two years to get them in before we realize all those.

The actions that we are doing include realigning the organizations, which we have done, consolidating plants, which is an ongoing process, reducing costs in all parts of the business, relocating production between the plants to optimize the plants that produce it, as well as enhancing the product lines to do that.

So Jeff, where do you --? First inning, third inning, fifth inning?

Listen, some of the businesses we've only owned for about 30, 45 days. You could say we are further along on Pergo but we are not as far along with Spano.

Okay, terrific. Congratulations. Good luck.

Ken Zener, KeyBanc Capital Markets.

Good morning, gentlemen. Looking at tile in Mexico, where you have been obviously expanding your capacity as you bring in your product, could you discuss the growth you kind of had in that market and how much was share gains in organic? You talked about Russia as well in terms of a bit more promotional activity. I know that's obviously -- I believe that was about a quarter of Marazzi. If you could go into that as well. Thank you.

We will try to give you some feel for it, but we don't break out specific products and sales in each of the parts or the margins of each.

Okay, I guess if you were just taking share in Mexico, if that was half the growth and then if in Russia what's happening there? Because it's a hard market understand I think from our perspective. Thank you.

In Mexico, we put in capacity of -- new capacity of -- I think just under $100 million about a year ago, a little less than a year ago. During the year, we have gotten -- it takes over a year to get it up to the efficiencies. We're getting close to where we would like it to be. By the end of the year, the costs in the new plant should be pretty close to the same as every other facility that we have.

At the same time, we started promoting product to use the new capacity using lower value products as we are training the people and the production is running to the plant. What we are doing now is moving it to higher value products in the marketplace. We still have a limited share of the Mexican market place and have a large amount of room to grow. We believe in the market place that our customers are looking for alternatives to purchase product from and we believe we are a good alternative with a product offering from the top all the way to the bottom.

In Russia, the market is a very fractured market. We believe we are the largest participant in it. Nobody in the market has more than midteens market share approximately, so there's a lot of opportunities to grow in Russia. We have a management group that's been there for a very long time building the business from a very small business to where it is today. We have the integrated structure there where we manufacture the product. We have distribution across the country all the way up to retail and franchise stores to move the product to market.

In this period we just finished, we started doing more advertising in the major retail markets in order to enhance the value of our brand and become more aware of our products in the marketplace, which is helping us overcome the slower growth in the economy to offset sales, the softness in the marketplace. We are also increasing our sales into the new construction part of the market which is still doing -- did not have the decline or softness that we saw in the replacement marketplace.

In addition I guess in Russia, we've come out with a brand-new product line the first of the year and it's being accepted better than we had anticipated. So we think we are doing well given the structure. We believe we have a long-term opportunity to grow in the categories we are as well as expanded into other markets.

Thank you.

Dennis McGill, Zelman & Associates.

Good morning. The first question, Frank, you mentioned that the acquisitions were coming in ahead of expectations thus far. Can you just talk a little bit about where that is? Is that topline or cost and maybe even by geography?

We are not prepared to talk about them individually, but we have I would say from a margin and bottom-line standpoint probably better performance than what we had anticipated.

Okay, then on the nonresidential side, I think you've talked consistently that that has been a growing market for you. Could you maybe break that down between ceramic tile, carpet tile, and then broadloom carpet just to kind of understand the puts and takes within that?

We are not prepared again to give you specific numbers. We can tell you that the commercial market is still growing for us that in each of our segments, it's growing on all the pieces. The ceramic segment has a larger portion of commercial than does the carpet segment. I think we have given before that it is about 40% of our business in that segment. And in the carpet segment, we are seeing a change in it as the commercial tiles continue to grow, so we are having very high growth rates in our commercial tile with taking share from our broadloom business.

We see going into the fall a continuation of what we have been seeing.

But broad loom is growing still?

Yes.

Okay. Thank you, guys.

Mike Wood, Macquarie.

Thank you, can you give a bit more color in terms of the positive mix shift in carpet? That's mainly coming from area rugs or new product introductions and essentially how sustainable is this? Is this a one-time snap back or a cyclical shift or just continued product evolution?

We've been working for the last four or five years on strategies to improve our business, improve everything within it and is starting to pay benefits that we have. We are seeing better mix from higher value products. We've been talking about leading the soft category. We have three different pieces within it driving it. We have better volume going on in our carpet business, which is helping our costs. We continue to improve our manufacturing costs and we continue to control our SG&A costs, all of which are benefiting the margins.

Okay, got it. Also in the Belgian -- the melamine business with Spano acquisition, I believe you'd said in the past that there was some tougher price discipline in that market. Since the acquisition, have you attempted any price increases or had any success there?

We have not done anything at this -- what we've done so far is we've restructured the management and sales organizations to put them together. We are getting the products, so each one had some slightly different products about putting the sales groups together. We could offer the product offering to a broader customer base. We are optimized -- we have the potential to optimize the manufacturing assets. We believe the reductions in infrastructure we can do to improve it. We are just in the initial stages of developing how we are going to get there.

Okay, thank you.

Dan Oppenheim, Credit Suisse.

This is actually Mike Dahl on for Dan. I appreciate all the color on the various initiatives across the business. I was curious about on the Ceramic side, you mentioned you are testing this distribution strategy, the single center distribution in Vegas. How should we think about the margin opportunity from that and is this a sign that if this were to go you well, you would explore broadening that out to other markets as well?

You have to go back to what the strengths and weaknesses were of each of the brands prior. The Marazzi brand basically focused on medium to higher end residential floor tile. They were trying to drive their business through that. In our business under American Olean, we have a commercial product line which they don't offer. We have wall tile they don't offer. We have a broader pricing spectrum of products we cover and then we also offer assorted things and installation and other packages to give a full package to the customer.

What we are doing is offering to both our distribution customers as well as where we have weak distribution the combination of offering both brands to our customer base together and that will allow us to have a complete line competitive with our complete Daltile line. We believe that doing so, we will be able to attract more customers and increase both the brand penetration and the market place.

Okay, thanks. Also on Ceramics, could you quantify what percentage of SKUs were impacted by the product review and also talk to the margin differential between some of the larger decorative tiles and some of the weaker SKUs that you are discontinuing? Thanks.

I don't have the detail of the SKUs. They are not -- there are a significant number of low productive SKUs in the Marazzi Europe line that we are going to remove from the line. At the same time due to limited capabilities in equipment, they were limited in how much of certain higher value products they could make. We have agreed to increase the capacity, make changes in it to improve the amount of the higher value of products we can do and restructuring the manufacturing.

They ran the business. They had plants in different countries in Europe and they ran them each fairly independently. What we are doing is running them more holistically and so by moving products around, we have capabilities short-term of producing a different mix of products. We think it's the right thing to do, and we will continue down that path.

Any quantification on just what you can do on a margin basis from those higher value products?

A minute ago, we gave a view that said that over time we expected the margins of all these acquisitions collectively over the next few years to be able to move it up 2% to 4%, which is about as close as we are going to get you.

Okay, thank you.

Eric Bosshard, the Cleveland Research Company.

Good morning. Two questions for you. First of all, Europe, can you clarify what you are seeing and expecting in Europe? I know you talked about Pergo and Spano being down this year and Marazzi being up, and I know there's different pieces there.

Could you just kind of cut through and talk about what you are seeing in terms of demand in the Europe market in the first half, and expectations for the second half?

The southern part of Europe continues to be weak. We are seeing declines. The northern part tends to be better, but also declines. We have different product categories that are more related to new construction versus remodeling, and you are seeing differences there.

Country by country, there are significant differences. Going forward, our hope is to have limited downside and possibly be at a bottom. Don't know.

The other thing, Eric, I would point out is if you look at our two businesses over there, Unilin, Unilin is primarily in Middle and Northern Europe, which countries are performing better as you know than Southern Europe. Marazzi does have a presence in Southern Europe, but as we've talked about, they've been able to offset a lot of that.

Their businesses in Europe have been able to offset all of that, a lot of that, with exports into other areas around the world.

Secondly, the management changes that you've made as you've consolidated the new businesses within Tile and Laminate, could you just speak little bit of what their marching orders are? I know you've spoken of the focus on improving profitability, but interested in how that has balanced relative to accelerating sales growth and market share?

I will try to repeat some of the things that we talked about. In the US, we are operating both together as a single entity that we are looking at combining the two brands here which we think we can increase penetration both through distribution as well as the areas where we don't go through distribution. We believe that the combination of those will allow us to increase the penetration of those. We believe that the equipment can be optimized by taking the products that fit which plant best across the entire enterprise and increase the productivity cost structure of those.

In the European business in Ceramic, we are changing the business philosophies dramatically. They used to run the business as a country-by-country basis, almost in independent businesses. We are -- we have put a single management structure over the top where all the manufacturing is reporting to one gentlemen, all the sales are reporting to another that we are taking the product lines, which they used to go to market separately, and we are going to put them through all -- a unified salesforce to drive those.

We are focused on increasing our business in areas in Northern Europe. We are focused on increasing our business in Northern Africa and other countries around. We are increasing the amount of premium product through short-term changes as well as new investments to allow those to occur, which will take them time to maximize. What else can I tell you?

That's helpful, thank you.

Susan Maklari, UBS.

You mentioned that you are seeing a definite improvement in the repair or remodel side of demand in several of the segments and it seems like this is the first quarter that we've heard about that in quite some time. Can you give us some more details around exactly what you are seeing there? Is it increased sales? Is it people moving to a higher price point in terms of product mix? Just some sort of sense of what's going on there.

In all of the different channels in both the businesses, we are seeing growth through the specialty store channel. We are seeing growth in the home center channel in both cases as well as the other parts and pieces of them. We believe that it's being driven by several things. One is that increasing home prices around the country is giving people more confidence to put more money in their homes. The economy, though not growing as much as we would like it to be, is growing and there's more people working in each one.

We are seeing some and it's harder to get because there's a lot of moving parts -- we believe that as that grows further the people that spend money on remodeling tend to purchase higher-quality products and should improve our mix as we go through in all the different categories.

I will add on the mix side, though, Susan, it is still early, and a difficult in the cycle, a little difficult to evaluate mix with price increases that we have had and new products and pre-buying that's going on. It's a little difficult to evaluate what's going on with mix.

Okay, then have you guys seen or heard sort of anecdotally that there's been any changes in demand or are consumers having any reaction to the fact that rates have moved at all? Is that impacting their ability to maybe finance projects or the way that they think about taking these things on?

We are not getting any input in either direction on that.

Okay, thank you.

Bob Wetenhall, RBC Capital Markets.

Good morning. What a great quarter. I wanted to ask you guys what are you seeing in terms of raw material costs and pricing initiatives to offset it? It sounds like it's kind of at loggerheads right now. Any color would be terrific.

Each one of the businesses have different things driving it. So the carpet business, we're in the middle of implementing a 4% to 6% price increase that we now announced some time ago. We talked about the lag in recovering it and that we anticipate to cover it now. At the moment, we haven't seen significant changes in it. We continue to watch it as we go through. In that area, some of the chemical prices are under pressure. However, there's some increases in the oil prices so we are just watching it. We will have to react to it.

In the Ceramic segment, we have the natural gas prices have gone up and the gasoline prices on the trucks and in that business we sell a lot of it delivered, so we've announced a price increase in the third quarter to try to recover those changes and some others with it.

In the wood business, the lumber prices on the solid woods and the engineered woods are going up. We've announced three or four price increases this year. We are still implementing those. Hopefully we are reaching a peak.

Thanks, that's very helpful. So your Carpet sales were 5%. This is the best growth rate since the fourth quarter of 2011. So that's obviously an exciting development. Is this mid-single-digit growth rate in your opinion based on what you know now likely sustainable during the back half of the year? Thanks so much.

We are hoping that the present trends will continue.

Fair enough, thanks a lot.

Michael Rehaut, JPMorgan.

Good morning. This is actually Jason Marcus in for Mike. The first question is going back to the Ceramic segment for a minute. You saw a really impressive improvement of about 260 basis points in the quarter. I was wondering if you could let us know kind of an order of magnitude how much of an impact the higher volumes had relative to Marazzi and the sales mix?

And then in terms of the year-over-year progression in margins for the next two quarters, do you think you will be able to maintain the same type of improvement you saw in the second quarter or do you think you'll maybe even be able to improve that even more in the back half?

It's all built into the estimates we gave you. We gave you an estimate for this quarter. We tried to give you some view of the seasonality of the businesses in reference to history and you should be able to get pretty close.

Then in terms of the different industries that you sell to on the commercial side, education, office, healthcare, and government, I'm just wondering if you could quickly run through the trends that you are seeing in each of those?

I guess just high-level, the corporate hospitality and healthcare, the strongest markets that we were seeing in the different pieces, we see that they will continue like they are going at this moment.

Okay, thanks.

Sam Darkatsh, Raymond James.

Terrific quarter. At the risk of being overly simplistic, and I do respect the fact that you don't give a whole lot of details around your guidance, but I'm looking at the third-quarter guidance that frankly shares results pretty similar from an EPS standpoint to Q2. Yet you've got a lot of things that are sequentially better in Q3 as you suggested.

You've got better carpet pricing in Q3. You've got no FIFO impacts like you had in Q2. You've got higher prices in Ceramic and Wood and the volume has also accelerated through the quarter. So I am just confused as to what the offsets there exists between Q2 and Q3 on the negative side that would cause you only to be hitting in the same general area as you did in Q2?

If we could get the Europeans to quit going on vacation for a month or so in the third quarter, you wouldn't have the same results. So it has all got to do with what happens in Europe. The majority of it is what's happening in Europe and around the -- they all take off, which happens every year.

I would think, though, that overall volumes there would be not all that dissimilar Q2 to Q3. Is that the area of conservatism that you are baking in there, you're not sure where European margins shake out?

No, the European sales are less.

The last question I would have, Frank, and if you mentioned this on the call I apologize. Available liquidity as it stands and where would you feel comfortable where that liquidity needs to be for you to make a fairly substantial acquisition going forward?

We are at $300 million right now available on our revolver. And with regards to acquisitions, we continue to look at anything anybody brings us but we are focused right now primarily on integrating those acquisitions and we will continue to pay down debt.

The other thing to point out that has happened favorably is our debt to EBITDA ratio has continued to improve just from the first quarter to the second quarter, it's improved significantly, so we will continue to do that.

We are expecting the ratio to continue improving significantly, so it's not a matter of being able to get the money, it's a matter of being able to have the management to tackle how many things at the same time. We think we have the capability to buy other ones. It will be greater over time. If we find the right ones, we will take actions.

Understood. Again, terrific quarter. Thank you.

Kathryn Thompson, Thompson Research Group.

Thanks for taking my questions today. I wanted to pull the strings a little bit more on Ceramic margins both in the quarter and looking forward not only just for the back half, but over the next two to three years.

First for the quarter, how much of the over 260 basis points year-over-year improvement was to the core business versus acquired just relatively higher acquired margins? And as we look into the back half of the year, how should we think about Marazzi?

Finally, you originally had targeted a 13% to 15% type margin over the next several years. Do you think that there could be upside to that target? Thank you.

A couple questions in there. I will see if I can hit them all. But the first thing I want to point out is with these acquisitions as I talked about last quarter as we get further and further along in the integration, it's very difficult to pull them apart and say X amount of the margin improvement came from the acquisitions and the other amount came from other things that we are doing. So we really can't address that.

With regards to the future looking out over the next couple years, we are expecting our Ceramic margins to get back up to the kind of 13%, 14% range that they have grown historically.

It would also help to have Europe improve a little bit, has a lot of upside.

Do you think that there is possibility for upside beyond that 2013, 2014?

One step at a time.

Okay, great. If I could sneak one last one in. How much of the Americas low teens growth in Ceramic was Mexico versus the core US business?

The core business is so much larger than the other it's basically setting the pace. The other one is a small part of the total.

Okay, perfect. Thanks so much.

David MacGregor, Longbow Research.

Good morning, everyone, and congratulations, Frank and Jeff, on the progress early on here. As usual, you guys haven't wasted any time getting to work.

I guess for starters, Frank, in the past you've given some guidance on contribution margins, Ceramic, Carpet, Wood. I'm just wondering how the acquisitions changed those numbers you gave us in the past.

I think we are still in the same vicinity as what we have given you in the past, about a 20% contribution margin in Carpets and mid-20s for Ceramic and upper 20%s to 30% range for Laminate.

Okay and then the 2% to 4% margin improvement on the consolidated numbers you discussed earlier, I just wanted to clarify how much of that was restructuring and how much of it is, if any, is just the operating leverage off the topline growth?

It's all of the above.

That's everything all in, the expected margin improvement?

Yes.

Okay, then finally just because Sam brought up the M&A question if I could tag on there, most of the category growth at least in North America has been in hardwood and LVT. These are both categories where you've got a fairly limited presence or you are sourcing product. So I realize you got your hands full right now. You are integrating your plan to pay down debt but can you just talk about where within your M&A priorities going forward these two categories may stand?

We have a significant wood business. We have a limited LVT business that we are importing products into US and Europe. We are in the process of building an LVT plant in Europe that should be up and running sometime next year. As that one proves itself out, we would be prepared to expand into those categories and other geographic markets.

Thanks very much and congratulations on all the other targets. Good luck going forward.

Keith Hughes, SunTrust.

Thank you, first question within Pergo, the plant closures in Sweden you had referred to, when would those be completed and when will all the costs have been incurred on that process?

The completion will be by the end of this quarter. The operations will be moved to our Belgian plant and be supplied out of our Belgian plant and the costs I guess are all --

Most of the costs will have been done by the end of the third quarter.

There's some in the fourth -- some later because there's product transitions and other things in updating the product line in Europe, so some -- Frank gave you some of the numbers earlier about the rest of the second half.

Okay, I don't know if you mentioned this in the prepared statements but on Spano, there's -- I know there's going to be some manufacturing rationalization there. What kind of timeframe are you looking at on Spano?

We are still evaluating the opportunities. There are a number of plants close to each other and the opportunities there are -- can we move the -- use the best assets in the place, can we put more investments in? We haven't concluded yet.

Nothing has been announced.

Finally on -- you had some positive comments in the press release on the rugs. I know that's been a problem for some time. Do you think rugs year-over-year will be a growth category for you in the third quarter?

The tails have improved. What's happening in the rug business is that as the retailers perceive -- we tend to sell a large portion of it to discounters, mass merchants, and over the last year or so, they have been compressing the price points, trying to make them more available for people with incomes that are getting squeezed. So we are having a significant problem in the average value as they compress it.

We're spending a huge amount of effort trying to bring them higher value products that they can sell at higher price points, so it is a compression of the prices that's our biggest problem.

So not really units, compression of prices?

Yes.

The retail price points.

Okay, is that going to turn positive or we still have got some work to do in the third?

It's better than it was, but we are still working on it.

Okay.

Stephen Kim, Barclays.

Thanks very much, guys, and I appreciate all of the info and also let me add my congratulations. Jeff, this is probably a question for you. I was curious if you could talk a little bit about the evolution of your management style and in particular, I'm curious as to whether you can give us some sense for how you -- what current bottlenecks you see in your current -- the way you currently have your management structure and how you have -- how you monitor what's going on in the field and how you allow the operation to make decisions as well as you have.

If there's any bottlenecks that we should be -- or that you are primarily thinking about, which might -- you might need to address as you contemplate becoming an even bigger and more global organization?

I think that was just taken on in the last six months is a huge piece of acquiring as many businesses in as many continents and as many different product categories as we have all at the same time. The reason we are able to handle it is because of the management structure. Within the management structure, I have a Chief Operating Officer who is over the business and helps me execute the strategies across the business.

Under each of those, we have three segments. We have basically a Carpet segment, a Ceramic segment, and a Laminate and Wood segment. Each of those has a President that is driving the day-to-day strategies and executing the business. Then under each of them, we then have different product managers, category managers, channel managers, and collectively, we set the tone for where we want to go.

We have very good processes in place. We built over years of going into the year. We go through strategic planning process. We come out of that with very specific things that we expect to accomplish over the next 12 months. They've put together a cost savings programs, product innovation programs, they assign it down through the organization to different people within it.

Monthly, quarterly, they review the progress on those and keep adjusting them as necessary and we have a really good progress to execute. We've been listening to all the things that we are doing in these different acquisitions. There are hundreds of pieces moving all at the same time. Each one of those acquisitions falls under a different manager.

For instance within the Laminate business in Europe, there's one group that's driving the changes with Pergo. There's another group driving the changes with Spano. And each one there's another group driving the US changes in Pergo under the US management. And so each one is broken down into segments with different ones, so no one group has to take the challenges of any one piece.

I think we are well set up for the long-term. The management is as strong as it has ever been. The systems and processes continue to get stronger every day. I think being able to handle this and all the different activities we've got going on shows how it's working.

Certainly so far it's been working great, so I appreciate that color.

I guess my next question relates to Marazzi and the Pergo acquisitions, both of which you are doing integration work and seeing opportunities for expansion, both domestically and overseas. I was curious if you could share with us kind of a generalization as to whether you feel that -- where you feel for Marazzi and Pergo more of the opportunity or low hanging fruit exists, whether it be domestically or overseas for Marazzi and also then for Pergo?

Each of the businesses have unique opportunities. We talked to a lot of them over the last hour. The US business is the operations side of the Pergo business. There's ways of improving it. They were starved for cash and putting them together utilizing the best assets across it, internalizing things like board production both in Europe and there. They had simple things like they were outsourcing maintenance. It's all being in-sourced as we speak. There were things like the raw material supplies and different pieces. We are internalizing those.

In Europe, the Pergo assets were putting -- most of them were 20 years old and outdated. The reason we are closing the plants up, it costs more to fix them than they are worth. We can leverage the assets where we are by closing the assets there and moving them to our other plant, they go from having the worst assets in the industry to having the best assets in the industry.

On the Marazzi side, the business in the US was running really well when we got it. We are looking for synergies across the pieces in marketing, branding, and products, increasing distribution we think as a big opportunities.

Europe, the European ceramic industry from peak to bottom is off like 50%, so they had already done many changes to do it. The big opportunity in Europe is to reduce the infrastructure costs between -- we have many things going on to improve the asset quality and to broaden the product mix and boy if we ever get any help in the marketplace, we have big upsides in it. The Europe -- the Russian business is running well. We just have to keep feeding it capital and keep looking how to grow it in other areas that they are not in over time.

All have good opportunities. We've got them all lined up and we're going after them all.

Okay, great. That's great. Thanks very much, guys, and congratulations.

There are no further audio questions.

Thank you for joining us for our second quarter. Have a nice day.

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