莫霍克工業集團 (MHK) 2013 Q3 法說會逐字稿

Good morning, ladies and gentlemen. My name is Ryan and I will be your conference operator today.

At this time I would like to welcome everyone to the Mohawk Industries third-quarter 2013 earnings conference call. (Operator Instructions) As a reminder, ladies and gentlemen, this conference is being recorded today, Friday, November 1, 2013.

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

Thank you. Good morning and welcome to the Mohawk Industries quarterly investor conference call. We will update you on the Company's progress during the third quarter of 2013 and provide guidance for the fourth quarter.

I would like to remind everyone that our press release and statements that 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 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.

Thank you, Frank. Today I will review our third-quarter performance, provide a general overview of market conditions, and later discuss our fourth-quarter guidance. As the US housing industry recovers the flooring industry results are improving with the ongoing growth in new residential construction and residential remodeling.

Commercial construction and renovation continue to provide opportunities, particularly in hospitality. Mohawk's recent acquisitions have cemented our position as the world's largest flooring manufacturer and this quarter we reported the highest adjusted earnings per share in our company's history.

During the period, higher US volumes, efficiency improvements, and the performance of our acquisitions have supported our strong growth. Our earnings per share were $1.63 as reported, or $2.02 excluding unusual charges, an increase of 94% over adjusted third-quarter 2012 results.

For the period our sales increased about 33%. Our legacy businesses delivered solid sales growth and our recent acquisitions contributed significantly to our increased revenues.

For the quarter we controlled our overall SG&A and improved our adjusted SG&A in our legacy business while continuing to invest in samples and merchandising to support our new product lines. Our adjusted operating income increased to 11%, improving 350 basis points over the prior year with growth across all of our segments. To deliver higher operating income we have enhanced our product mix through innovative collections, improved our manufacturing and distribution efficiencies with new systems and processes, and lowered SG&A.

In our second-quarter conference call we discussed our ability to expand our markets and increase our profits through acquisitions. During today's call we will update you on the progress we have made integrating Pergo, Marazzi, and Spano into our business through organizational restructuring, facility consolidation, cost reduction, relocation of production and assets, and new value-added product offerings.

Additionally, shortly after launching our fourth annual sustainability report, a leading industry publication honored Mohawk with its top sustainability award to recognize the exceptional success of the Company's many green initiatives.

As more attention has been focused on the healthcare in the US we are committed to having the safest and healthiest industrial workforce by investing in preventative care, chronic disease management, and processes that save money through higher quality care and empowering our people to make better individual choices through training and educational resources.

The recent US government stalemate negatively impacted consumer confidence. Despite this, the fundamentals of the US economy remain solid and we expect consumer confidence to get back on track after the recent agreements were reached by our government.

Though rebounding, new housing construction has not yet risen to its historical average. The National Association of Homebuilders projects a significant gain a new home starts next year with volume rising 25% to 1.150 million units. During the next few years we anticipate housing will grow faster than the overall economy as the market expands to satisfy pent-up demand from the recession.

In August, home prices rose for the 18th consecutive month which has positively impacted remodeling and led to improved industry product mix as homeowners select more premium flooring options. For some time remodeling spending has lagged its historical average, but we are seeing signs of improvement in Harpers LIRA Index, which forecasts stronger residential remodeling for the remainder of this year and 2014. Leading construction management consultants project commercial construction will grow by 5% in 2014 with hospitality strong and retail trailing.

In our other markets, Mexico's rapid growth has cooled but should benefit next year from the proposed opening of Mexico's energy sector to foreign investment, government stimulus, and construction required due to widespread tropical storm damage. Many believe Mexico is the emerging market with the greatest upside potential.

Russia's economy continues to experience headwinds and the government is taking steps to reignite economic growth through stimulus policies and lower interest rates. New residential and commercial construction remains strong, although remodeling has slowed in the overall -- with the overall Russian economy.

While the European market remains at a cyclical bottom, many people are predicting improvement next year. Northern Europe is outperforming the southern part of the continent as government policies transition from a focus on austerity to an emphasis on growth and investment. The flooring industry in Europe has not yet seen a significant improvement with both residential and commercial markets remaining below historical averages.

In our carpet segment the third-quarter operating margin was the strongest it has been in more than six years and operating income rose 50% over the prior year as a result of product mix, productivity, cost controls, and volume leverage. We focused on the residential premium product category with differentiated, super soft carpets that have higher margins.

And we are transitioning our commercial collection to premium fibers which we manufacture and provide better value to our customers and higher returns to Mohawk. With this transition our commercial volumes have been temporarily impacted, but will improve as new products gain traction in the market due to their more competitive positioning.

We are substantially increasing polyester production capacity, allowing us to expand our participation in the value category of the builder, multifamily, and retail channels. We are introducing about 40 new polyester residential products in the second half of this year to expand our sales in this faster growing part of the market. We fully executed our carpet price increases in the period and our selling prices are now aligned with our costs.

Our adjusted SG&A continues to improve from cost reductions implemented during the year and are at their lowest absolute amount since 2007. We have consolidated most of our carpet management team in Calhoun from multiple locations to enhance our collaboration, efficiencies, and speed of execution.

In residential, product mix continues to improve as we expand our industry-leading position in soft carpet technology. We are broadening our selection of SmartStrand and Wear-Dated Embrace with more fashionable, higher style products to maximize our share of the premium soft carpet category. We are introducing a new premium soft appeal collection of polyester with luxurious softness and a leading environmental story utilizing our continuum technology with up to 100% recycled content.

As we expand our polyester offering to satisfy all styles and price points, we expect additional growth in 2014. We have completed our product realignment in home centers and are seeing accelerated sales growth.

In commercial, our margins improved significantly with positive price and mix while increasing the value proposition to our customers by utilizing premium fibers that we are manufacturing internally. Growth in hospitality continues to outpace other sectors by leveraging our specialized design capability, high-resolution print technology, and collaborations with our ceramic business on large projects.

Productivity and efficiency gains are expanding our margins as we reduced our costs through improved manufacturing processes, higher material yields, and efficiencies from realignment of our assets. Significant investments in fiber and yarn production and reengineered materials have improved our costs. Distribution costs have reduced with cuts in infrastructure, higher truck utilization, and improved productivity from new processes and systems.

Our ceramic revenues were up 84% compared to the prior year through strong results in our legacy business and the Marazzi acquisition. During the period operating margins grew 290 basis points to 12% as a result of higher volumes, efficiency gains, and improved product mix.

In the US, greater use of ceramic tile in new residential construction has driven sales growth higher than other flooring product categories. Our North American ceramic sales, which include Dal-Tile, Marazzi, and our Mexican operations, had a double-digit increase. We continue to optimize the value of our global ceramic assets by manufacturing products previously outsourced, moving production to the US to improve lead times and margins, and utilizing our red body capacity from our Mexican plant to meet demand in the United States.

Additionally, we are launching in our Dal-Tile American Olean brand new products manufactured in Europe by Marazzi. A 2% to 4% price increase in the US was implemented in August to offset higher energy, transportation, and other costs.

We continue to expand the Dal-Tile brand position as the complete provider of all products and all price points, enhancing our position with national and regional builders and retailers who focus on the tile category. We are executing the initial stages of our brand realignment with American Olean and Marazzi lines.

The combined offering will satisfy all residential floor and wall tile needs, as well as a broad selection of commercial products. Marazzi Products are positioned slightly above American Olean in the residential floor tile and American Olean closes the gaps in Marazzi's wall tile and commercial selections.

This combined offering has been implemented in the Las Vegas market and over the next six months we will be launching in additional markets on the West Coast. We will also be offering our American Olean and Marazzi distributors opportunities to enhance their market position utilizing both brands where it is appropriate.

In commercial we will begin offering higher style tiles using Marazzi Europe's unique technologies to enhance the design options for large commercial projects. We have realigned the US Dal-Tile and Marazzi ceramic operations with a unified management structure, including sales, marketing, manufacturing, product development, and administration. During the first half of 2014 we will realign product manufacturing to improve asset utilization, customer service, and distribution.

The consolidated Dal-Tile, American Olean, and Marazzi business has strengthened our position in the US ceramic market. Our home center and independent distributor market is now stronger and our product capability has improved. Efficiencies are gained through distribution and plant utilization in the US by driving savings to enhance our margins.

In Mexico, our new plant in Salamanca continues to improve its productivity, quality, and cost. To offset the slowing Mexican market we have reduced SG&A and we will optimize capacity utilization by selling products into the US builder market. Our Mexican margins and market share are improving by shifting Salamanca production to higher value products from promotional goods during its start up.

In Russia, the ceramic market is softening with the general economy. We are improving our position and outpacing the market, though we have some pressures due to promotional activity by our competitors. Our expensive product offering and our strength in new construction and franchise retail channels have enhanced our market share during this time. This year's product introductions are performing well and are strengthening our differentiation as a style leader in the market.

We are introducing channel-specific ceramic tile collections to increase our market opportunity, segmenting the commercial, new residential construction, and home center channel. We have expanded our advertising campaign to strengthen our consumer brand awareness and enhance market perception. With the strength of our brand, we are receiving greater interest from local ceramic retailers and opening new franchise stores that only offer our ceramic brand.

Going forward we are increasing participation in new residential and commercial construction sectors that are presently growing faster than the remodeling category. To support this we are expanding our personnel who drive specifications and introducing value-price porcelain alternatives for large new construction projects. Best practices are being implemented to drive manufacturing efficiencies, enhance our logistics and marketing tactics, improve product lifecycle management and SKU management, as well as reduce the costs of our materials and operations.

We continue to support future growth in Russia through investment in new products, increased marketing, and the expansion of our sales organization and production capacity. Our European ceramic delivered a solid performance with increased sales in Eastern Europe, Middle East, and the Far East offsetting softness in Western Europe. To drive significant sales and operational improvements in Europe, we are implementing our strategy of a single, unified ceramic organization rather than a country-by-country structure that existed before we purchased Marazzi.

Within regions we have consolidated the salesforce to remove duplication of efforts and offer a comprehensive selection of products. We are improving the planning and manufacturing processes to reduce run sizes and working capital as we improve our inventory turns. Though in the short term it is negatively impacting our overhead absorption.

To lower our cost position we are in eliminating underperforming SKUs and introducing more decorative and larger size ceramic tiles to improve our product mix. We are enhancing our merchandising to accentuate the value of our products, introducing CRM tools for better customer support and market knowledge.

To improve our styling and reduce costs we have approved investments to upgrade our flooring production line that will be installed next year. We are realizing synergies across our global ceramic business and utilizing common vendors and sharing best practices across all manufacturing.

Sales in our laminate and wood segment rose 37% over the prior year, with most of that increase coming from North America and our acquisitions of Pergo and Spano. Operating margins, excluding unusual and one-time charges, were 13%, up 380 basis points over the prior year with significant growth of North American sales offsetting slower European markets.

Our legacy North American business improved in all product categories and customer channels, driven by residential new construction and remodeling. The US management team is focused on improving productivity and efficiencies across the combined Unilin and Pergo organization, optimizing flexibility to be more responsive, and adding new capacity to satisfy demand for single-plank laminate products.

The in-sourcing of raw materials, maintenance services, and boards was executed during the period. We have integrated Pergo's freight and distribution with the Mohawk logistics system to deliver improved service and greater efficiencies. Our Malaysian wood plant is running at full capacity and efficiencies are improving with new automation to offset increased labor costs in the region.

In our Russian laminate plant we are leveraging higher volumes and local materials to reduce costs. In Ukraine, we have implemented our own distribution structure to maximize our sales as the country's economic recovery strengthens. In Australia, we are increasing our distribution through multiple channels and broadening our product offering with the addition of carpet tile. In both Russia and Australia, we have implemented price increases of 4% to 8% on laminate and wood to offset currency changes.

The Pergo manufacturing facility in Sweden have been closed and we are now producing Pergo-branded laminate in our Belgian facility. New products to update the Pergo line are being refined and we anticipate introducing them in the first quarter of next year. We have approved the construction of a new luxury vinyl tile line in one of our Belgian facilities and the line will be operational by 2014.

There are many similarities between LVT and laminate manufacturing, so we can leverage our technical design and click expertise to differentiate our products.

Our European business continues to be soft, though most forward-looking indicators are predicting improvement in GDP as a cyclical bottom appears to have been reached in the economy. To offset these conditions we continue to control costs, introduce automation, and deliver manufacturing efficiencies and material yields.

Our new insulation board plant in France has begun production of our products. Our insulation board sales continue to grow significantly and we are expanding our geographic reach with our new French facility.

Roof panel sales continue to be hampered by lower home sales and new construction. We have completed the consolidation of our Dutch roof panel plants to reduce costs, and we are enhancing our product mix with new panels that provide greater moisture and sound resistance and are capable of spanning greater distances.

Our board sales are under similar pressures from the European economy and we are unifying our Unilin business and our Spano acquisition to reduce operating expenses and improve efficiencies. To date we have closed a high-cost production line, we have reduced conversion costs, improved material usage, and implemented a 3% to 4% price increase to offset material inflation. We will close a manufacturing plant in the fourth quarter to further improve productivity.

We have consolidated our sales organization so that customers now have a single point of contact and are broadening our product offering utilizing the combined assets. We have identified many additional opportunities to enhance the costs and productivity of our plants which will be implemented over time.

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

Thank you, Jeff. Net sales for the quarter were $1.962 billion, up 33% from last year. The increase was driven primarily by acquisitions, which accounted for 28% of the growth, and our legacy business was up 5%. Our gross profit was $517 million or a margin of 26.4%. Excluding restructuring, the margin was 27.7%, 220 basis point improvement compared to last year due to strong productivity coupled with increased volume and favorable price and mix.

SG&A dollars were $341 million, or 17.4% of sales. Excluding restructuring, SG&A was 16.9% of sales, 130 basis point improvement compared to last year due to a continued focus on managing costs and improved leverage on increased volume. Our restructuring charges were $37 million for the quarter, which included $14 million in non-cash charges. In the fourth quarter we estimate an additional $19 million of restructuring costs, all for our three acquisitions.

Operating income, excluding charges, was $213 million with a margin of 10.8%. This is an improvement in our margin of 350 basis points, driven by a combination of the performance in both our legacy business and our acquisitions.

Our interest expense was $26 million, up from last year due to debt that we put on our balance sheet related to the acquisitions. Other expense at $3 million was up over last year and was impacted primarily by foreign exchange.

Our income tax rate was 21% for the quarter and that compares to a 20% rate last year. We are estimating the fourth quarter rate at 20%. Earnings per share, excluding charges, was $2.02, up 94% over last year.

If we move to the segments, in the carpet segment sales were $773 million, up 3% from last year, with carpet volume and positive mix driving higher sales. Operating income, excluding charges, was $70 million with a margin of 9.1%. This is a 290 basis point increase driven by improvements in price mix along with productivity.

In our ceramic segment sales were $767 million, up 84% over last year. Our legacy business was up 12% with overall growth driven by acquisitions. We had improvements in both our US residential and US commercial businesses.

Operating income, excluding charges, was $91 million with a margin of 11.9%. Again, an improvement of 290 basis points driven by a combination of volume, acquisition performance, continuing productivity, and leveraging of our SG&A.

In the laminate and wood segment sales were $451 million, a 37% improvement over last year. On a constant exchange rate basis, our legacy business was flat as the weakness in Europe was offset by stronger North American business.

Operating income, excluding charges, was $58 million with a margin of 12.9%. The improvement was from acquisitions synergies as well as productivity. In the corporate and elimination segment we had a loss of $7 million and expect the full year to be about a $30 million loss.

On the balance sheet our receivables ended at $1.154 billion and include $328 million from the acquisitions. Our DSOs for the quarter were 48.2 days, flat with last year. Inventories on the balance sheet were $1.6 billion and include $387 million from acquisition. Inventory days ended the quarter at 108.5 days, up primarily due to the acquisitions.

We have improved both our acquisition and our legacy business DIOs, but still have some work to do. Fixed assets ended the quarter at $2.684 billion. Total capital expenditures for the quarter were $109 million with depreciation and amortization of $82 million. We anticipate $410 million of capital expenditures and $315 million of depreciation and amortization for the full year.

Finally, free cash flow was $104 million for the quarter, resulting in total debt of $2.3 billion. Our leverage improved to 2.3 times debt to EBITDA as we generated good cash flow in the quarter.

With that I will turn it back over to Jeff.

Thank you, Frank. Mohawk today is in the strongest position in our company's history. We have substantially grown our profits and expect continued improvement next year. We have the most effective management team ever and each of our segments has a well-defined, long-term strategy to improve our business.

With our Pergo, Marazzi, and Spano acquisitions we are quickly moving to drive synergies, lower costs, and increase top-line growth. We have already executed many initiatives to improve the performance of these acquisitions, including implementing new strategies and organizational structures, upgrading marketing tactics and product lines, and reducing costs through best practices and closing high cost assets.

In our legacy businesses, each segment has defined significant opportunities to deliver improved results as the US business strengthens and we strategically invest in our products, capacities, and organization. With these factors, our guidance for the fourth-quarter earnings is $1.66 to $1.75 per share excluding restructuring or acquisition costs.

We have an aggressive improvement plan for 2014 and beyond. Over the next few years we intend to expand faster than the economy as our category rebounds in the US and abroad, improve our costs and efficiencies across our new and old businesses, and expand into new product categories or markets. We have the management strength, the balance sheet, and the vision to maximize returns to our shareholders.

We will now be glad to take your questions.

(Operator Instructions) Sam Darkatsh, Raymond James.

Terrific quarter. Couple quick questions and I will defer to others.

First off, the carpet margins, trying to get a sense -- they were terrific. How sustainable would they be? I understand that you have some more capacity coming online. You have got a new polyester mix that may degrade the overall margins a little bit. You have got the new fiber after the transition for the commercial business that may impact mix and margin.

How should we look, Frank, at the carpet margins over the next couple quarters or so?

We will tag team on that, Jeff and I. I would say that the margins in the carpet segment over the next several quarters will continue to improve as we compare them on a year-over-year basis. Remember, we will have seasonal impacts in both our sales and our margins, depending on what quarter we are in.

The margins improved from product mix, productivity and cost savings, which should continue. We are really focused on the SG&A costs as a percent of sales, and we continue to improve our cost controls as well as we made recent reductions this year. We expect higher sales from expanding the polyester that you mentioned, which should help the top line. And then the commercial expectations are that we will have higher growth and improved margins, also.

And then the final question would be; I understand that October in the industry has been much improved. Do you expect that to potentially continue into November, December? What do the year-ago comparisons look like in November and December versus that of October?

Typically, in October and November in normal years would be similar as you go through; then it falls off as you hit the end of the year. It is anybody's guess, but we think we are going to continue at the rates we are at.

Very good. Thank you much.

Dan Oppenheim, Credit Suisse.

Thanks, it is actually Mike Dahl on for Dan. I was hoping to follow-on on the margin angle. I guess you guys have certainly maintained an intense focus on productivity and bringing down costs. And I think we are all hoping for the type of improvement in demand that some of those forecasts called for that you noted.

But could you characterize maybe what inning you think you are in as far as progress on margins absent any meaningful rebound in demand? How much juice is really left there?

In all our businesses we believe that we can keep improving the margins through all the actions that we have been taking over the past few years. We made substantial investments in our capital this year. We are going to make more next year than we made this year.

We believe -- at the longer-term outlook we really believe that sales rates will improve next year in the US. That assumes the government doesn't stop it. We have had really strong growth in the ceramic piece and we are expecting that to slow somewhat.

In Europe, we believe that there will be a slight increase in the sales but it has some risk over there. We have seen in Russia, as we talked about, the economy slowing so we assume that growth will slow there, but we expect to outpace the economy there.

Given all those things, we still see the acquisition synergies are on track but it is going to take -- full execution will go beyond 2014 but there will be many things implemented during the year. So we see the margins continuing to expand as we go forward.

Okay, thanks. Then moving on, the vinyl tile line when you say up by 2014 should we assume is that a 1Q? And how should we think about the amount of capacity that represents and what it could do for sales here? Thanks.

The plant is being put up in Europe. What I said was it will take most of the year to get the plant up and operating, so the impact will be more in the 2015. However, we are selling LVT that we are importing from around the world into the European market as well as the US market as we prepare for that.

Any sense of just the amount of capacity that you are bringing on?

The capacity will probably be about $100 million worth.

Okay, thank you.

Kathryn Thompson, Thompson Research.

Thank you. We had started to see some improving residential repair and remodel trends really late spring, early summer. Could you talk a little, discuss a little bit more what you are seeing in the market now? And based on your past, what you would project forward for the residential repair and remodel trends?

In particular are you seeing particular types or price points doing better now that, say, you weren't seeing six months ago?

As you look at the different pieces, our remodeling business in the carpet was doing better because of the aggressiveness we have taken in the high-end part of the marketplace. We are tending to see some improvements overall, although it got a little softer lately. We think that as the home prices go up people will become more and more comfortable spending money on their existing houses as we go through, so we are still optimistic about the remodeling business improving.

We are also hearing in the market that there has just been a little bit more of a focus with you in particular, I wouldn't say taking market share, but you have spent a lot of time, understandably, integrating several major acquisitions and are taking some specific efforts to further enhance your US carpet sales.

Could you discuss some of those programs and maybe talk about -- I know you brought in a higher-end product this year, but what you are doing as you plan for the next 18 to 24 months in terms of product and sales programs? Thank you.

We continue to upgrade and drive the product categories. In residential carpet we are continuing support the higher-end products, but we are presently in the process of introducing about 40 new products in the polyester category with new technology we call Continuum. The Continuum technology is really differentiated where we can produce products with up to 100% recycled raw materials as well as they have better attributes.

Our commercial business we have been transitioning our premium products to fibers we produce and this provides a better value to the customer as well as higher margins. Though in the short term it has impacted the top line a little bit, but we believe it is going to significantly enhance our position.

We think we are well positioned for the market as it changes. We have done a lot of things to enhance our sales execution in the marketplace. Used better information tools to drive change through our organization and be able to communicate to our customers better. So we believe we are well positioned as the market improves.

Great. Thank you for taking my questions today.

Stephen Kim, Barclays.

Congratulations, guys. Great job. Two questions related to top line, if I could. First, in ceramic.

I was intrigued by a few things that you said. One, you said that you expected to expand your integration which you -- a process which have started in Las Vegas over the next six months in the West Coast. Just want to make sure that -- that seems to suggest that you have had some initial success in Las Vegas; just wanted to confirm that.

Then also if you could talk about in North America you said that you thought your sales were up double digits but should slow somewhat in 2014. I thought that was surprising because of what we just talked about, this integration going well in Las Vegas. Then also commercial really hasn't rebounded quite as strongly as we think it can and neither with remodeling, and so I was just curious if you could put more color around that expectation for 2014 in light of what we just talked about?

What happened is neither the American Olean nor the Marazzi line were complete lines by themselves, and so by owning the two together we are starting to merchandise them as a comprehensive offering to the customers. The first initial attempt at it was in the Las Vegas market.

In addition, we had some service centers around the country that Marazzi had. They had a limited number that only sold their products. We had some in our side of the business that only sold American Olean. So the first thing is to convert those all to complete lines so we can attract all customers in the marketplace and broaden the offering to both.

In both companies we have opportunities, and the West Coast seemed to be the greatest one to begin with, to pull those together. At the same time, both of those brands we sell through distribution where it's strong, so in markets where we're using third-party distribution we're going to offer those customers the opportunity to have a stronger product line also. Depending upon the success we have at it and what happens in the marketplace will determine how fast we roll it out over the next few years.

The other question I guess is when we look over the marketplace our growth in ceramic this year has been really high. What has happened is we have been able to grow it through new product introductions.

There is new -- we are leading the market in wood looks out of ceramic, which are growing rapidly, because they don't have all of the problems of real wood but you can't scratch them. So we have really captured a large part of that business. We believe they are all growing; we just think it is going to be hard to have that happen again next year.

Well, that is fine. Always makes sense to be conservative, so appreciate that color.

My next question relates to laminate. You had talked about the fact that in laminate sales overall legacy were flat; Europe being down, North America up. My understanding is that North America represents a minority share of the sales in that category and so my expectation was that North America was up pretty well.

I just wanted to understand is there anything there that you have been benefiting from, like a sell-in from a major product line win or anything like that, which we have to think about as we model -- anniversarying something as we model out to 2014?

Remember with the purchase of Pergo, Pergo was the major supplier to the high-end laminate through the home centers. So together we now have the dominant share of the laminate business that is sold in the US. So we have a much bigger position, so that business we have been able to improve as we go forward.

In Europe the market is still tough. People are spending less. I think it is probably a lot like the US market where the home side of it is getting hurt more than the general economy. When people cut back, they cut back there, so we will probably lag a little bit in Europe. An improvement of it as the European economy gets better.

I forgot what part I didn't answer of your question.

I was asking about was there a sell-in, because I was referring to the legacy business, not so much Pergo. Was there some sort of something that would cause a difficult comparison on the legacy side, the Quick Step side in North America?

I don't think so. I think I am missing something in answering the question. We also have a wood business in our piece. The wood business is increasing sales, too, in the US so that is helping the US side.

Maybe that is it.

It may be the wood piece.

Okay. Well, great. Thanks very much, guys. Good job.

Mike Wood, Macquarie.

Can you give us some color in terms of a higher growth that you are seeing in the polyester side of carpet? Is that cyclical because of the low price point at this point in the cycle, or is it more permanent because of new product development and the relatively lower price points that that category affords? Can you just give color on that and sort of how you are positioned from a mix of polyester versus nylon?

The answer to all your questions is yes. Polyester has become a more value proposition than the other pieces in the market, which is causing it to grow. It is participating across the spectrum.

We are leading it in the higher end part with soft ones. We have not participated fully in the more value categories and we are taking actions to fully participate in that going forward.

Great. Also, I believe you had previously commented that for the carpet segment high single-digit operating margins may be more midcycle. And you hit 9% in this quarter. Last time you did that was 2006 and your sales are 37% lower.

Do you have any updates in terms of should we still be thinking about high single-digit operating margins as normal in carpet, or have you changed that?

Mike, what we have been talking about is kind of an annual margin number. So you are looking at the third quarter there, which is one of our strongest quarters in terms of top line and margin, so I would say the answer is no. We are still saying kind of the normal run rate and the normalized environment is going to be 9%, 10% range.

I have a saying we use around here -- you are halfway there. So wherever we get we are expecting to go higher.

Michael Rehaut, JPMorgan.

Thanks. Good morning, everyone, and congrats on the quarter.

My first question has to go back to I think the biggest area of positive surprise for you guys on the carpet margins. If you look at 3Q versus 2Q, you essentially did the same amount of sales but you did another 200 basis points of margin, a real strong sequential improvement.

And so I am just trying to understand, number one, what are the biggest drivers to that? You have mentioned a bunch of them in terms of mix and productivity, etc., some positive price as well. But I was hoping if you could break down the drivers of that.

Then, looking forward, it does appear that in 4Q you are looking, at least on a consolidated basis, for margins to slow sequentially or to soften sequentially. And so just trying to get a sense of again, number one, particularly in carpet the drivers of the sequential improvement, the degree of magnitude there; and, number two, why would the margin soften sequentially on a ostensibly a similar number of sales?

Sequentially meaning next quarter or sequentially meaning next year?

I am really just talking about Q2 2013 to 3Q 2013 in the first part of a question and then 3Q 2013 to 4Q 2013 in the second part of the question.

First, is I'm not sure I got it exactly right. I think that the SG&A from second to third dropped about 1%, and the 1% as a percentage was driven by a lot of actions we took to reduce the different costs. We keep working on it.

And when I say reduced it, I don't want you think we are cutting back on the things that impact the future business. We are investing in new products. We are investing in marketing. We are investing in sales groups in order to do it, but we are cutting out the things that don't give us the returns that we want.

On the other side, with the manufacturing piece we do have the improving mix that continues as we keep selling a higher amount of higher value products. And at growing, which is one of the reasons that the sales weren't quite as high. We were so focused on driving the high end. The high end didn't grow as fast as the lower end process, which we are in the process of fixing.

In the improvements, besides mix we continue to cut costs everywhere. We continue to realign the plants. We continue to upgrade the products, the manufacturing assets with the investments we are making. The team is really working on maximizing all the pieces and the things we have put in place over the last four or five years are paying off.

On your other question regarding the sequential change in margins from Q3 to Q4, if we have that right, that question, normally again it is a seasonal issue where sales are down and margins are generally down when you compare it to the preceding two quarters.

I mean the last part of December -- very few people buy carpet at the end of December, so I mean we have very little sales once you get past the first week.

Okay, I appreciate that. I guess just looking forward into 2014 when you talk about the successful focus on mix this year that has occurred as you have focused more on the higher end in carpet. At the same time spent a lot of time talking about polyester and a lot of new products there to address more of the commodity side I believe. Or not the commodity, but more the value side, which does have a little bit of a lower margin.

So I am just trying to get a sense for next year, everything else equal, if you are just thinking about mix would that have a positive or negative impact on margins in 2014, given that you are still probably going to see some positive follow through from the higher end?

Is that a carpet question or a total product question?

Just carpet.

The carpet we expect the high end to keep selling more. You are correct that we are going to sell more of the mid to low price that are going to have not quite as much margin. At the same time we are expecting an increase in the volume, which is going to give us absorption and positive pieces there, and we are going to continue managing all the costs that we have been. So I mean we are expecting that increase in margins.

Susan Maklari, UBS.

Good morning, guys. Question for you regarding the pricing increases that you have been putting through. As things have gotten better are you noticing that your pricing power is improving any so that maybe you are able to get not just the offsets to the input costs, the higher input cost that you are seeing, but potentially just getting any true pricing that is coming through in there?

We always attempt to. We have to react to the market and we have to sell at competitive market prices. I am not sure whether there is a lot of extra price going in other than all o the actions we are taking to improve our mix, as well as reduce our costs across in general.

At the same time, we have to keep absorbing all the cost increases in labor and insurance and everything else that goes on. We have to offset; not so easy.

Right, right, okay. Are you seeing people moving up in terms of the kind of product that they are choosing? Is there less sort of a move down and maybe that trend is slowly reversing itself and you are getting people that are instead choosing to move up to a better product now?

I think it is bifurcated. The people with money are trading up and buying better, but there is a whole lot of people in the mid to end that have limited discretionary income and I'm not sure there is a lot there being moved up.

Okay, thank you.

It would also help if our government would help maintain our confidence in what is going on.

David MacGregor, Longbow Research.

Good morning, great quarter. At the risk of beating this carpet margin issue to death, I wonder if I could just go back and pick up on Mike's question. He asked if you could explore the individual buckets and I guess I'm going to ask if there's any you could help us by kind of weighting the individual buckets in terms of the influence on that 290 basis point margin lift.

I don't have the details of that to break it down further, other than to give you the pieces that caused it.

You talked about mix, operating leverage, and cost reductions. Would they be relatively equal in terms of their impact on that 290 basis points, or was mix by far the biggest element?

I would say that productivity is actually the largest component of the improvement, but mix would be right up there with that.

Okay. That is helpful. Thanks, Frank. What are you modeling for revenue growth in carpet for the fourth quarter?

We typically don't give very specific pieces. We give you the total that we expect it to be and you can see the trends that we are at.

We expect it to go up.

Dennis McGill, Zelman & Associates.

I guess I will just ask the same question backwards. In the third quarter where was the upside relative to your initial guidance?

Relative to our initial guidance?

Yes, for the third-quarter earnings. In other words, you performed probably about 10% better than what you guided us to, and I'm just curious where the upside came from.

Are you just in the carpet segment?

No, no, no, this is the whole business. Relative to the EPS guidance that you put out there last quarter.

So I would say we probably got a little more productivity across all the businesses than maybe what we were originally estimating and the mix was a little bit better.

Also the new acquisitions. It takes a while to make sure that our financial reporting and estimating in the future -- we keep improving it. So we think we have gotten much better from where we were six months ago and every quarter we keep enhancing our confidence in the future numbers.

By that, Jeff, do you mean the benefit of the acquisitions was better than you thought six months ago?

To Jeff's point, you are generally a little more conservative probably when you are looking at outlook numbers, forecast numbers until you become a little more comfortable with the business that you just bought.

Okay. Then I think could you get a little bit more specific on what you are seeing in Europe? I think the phrase you used was that it was soft. But are the rates of either decline or modest growth changing at all relative to what you saw over the last few quarters?

I'm not sure. The overall business in Europe of our legacy businesses is probably down about 4% overall. We have some categories, like insulation growing. We got other categories off more, so they are all over depending upon what it is.

Eric Bosshard, Cleveland Research.

Two questions. First of all, you mentioned a strong October earlier. I'm just wondering if you could talk a little bit about the pace of business through the quarter and if 4Q is expected to then be materially different than 3Q.

The second question relates to the acquisitions. I am curious how you would characterize where you are in the cycle of integrating these businesses in terms of the effort and also what the payback curve should look like and where that should terminate.

I think that what we were trying to get across with the sales was as we went through the third quarter we saw some softening as we went through, and we think that in October it looks like it is going back to more normalized levels that we had anticipated. And what was the second part of the question?

On the acquisition synergies, in each of those three companies acquisitions I would say they are pretty much on track with where our initial plans were. Obviously, the Pergo acquisition would be further along than the other two because we closed on it earlier.

We will see improvements. We are seeing some this year; we will see more next year, but it is going to carry on into beyond 2014 before we complete the execution of all that.

With the acquisitions I mean we have closed up multiple plants already. We have integrated the organizations. I mean we have some things that we are looking to make some large investments to throw out old assets. Those things take a while to do.

We are watching and trying to learn about the businesses, so that will continue through 2014 and 2015.

Great. Thank you.

Keith Hughes, SunTrust.

Thank you. Just going back to the carpet question again, refocus on polyester. As you go into the market, other than price what would be the drivers to take some share back in that market?

We have a huge customer base that typically likes us. We have a very broad offering we are going to expand that has differentiated products. We are the only company that can offer recycled products. In the high end we are going to be offering 100% recycled products, which the consumer likes. We think we just can execute well in the marketplace and then we expect to be competitive.

Second question in ceramic tile. As you put these three businesses together -- American Olean, Dal-Tile, and Marazzi -- the concept of doing retail ceramic tile like you are doing in Russia in the US, is that something that could be on the radar screen?

We don't see any way that it is appropriate for the US marketplace. In Russia what happened was there really was a lack of distribution and retailers and methods to go to marketplace. At points and places there they sell stuff out of the back of trucks and fields, so it is just an immature market that allowed us to be in that position at this point. The US is very mature and it wouldn't make any sense.

Okay, thank you.

Ken Zener, KeyBanc.

With the success in the Marazzi acquisition in the US I wonder if you could -- you have talked about a 2% to 4% price increase to cover costs. Can you describe how the competitive landscape is changing given your size and your distribution and how your competitors -- fragmented competitors, largely imports, have been responding to date? Thank you.

I think it is a little early to either know or answer the question. Most of the things we have been doing are on the backside of the business about how we operated to get in place. We are looking to utilize best practices across the business. We are looking to improve the design of the products.

We now have a broader offering of the products. And then, you are right; we are going to go to market in stronger positions.

The competitive position is that a larger and larger amount of the US needs are being manufactured in the US. There is companies in Europe that have opened or are opening manufacturing in the US to try to participate in it. And so in most of the markets the majority of it comes out of the local manufacturing, so we see that as a positive and we are well positioned for it.

On the other hand, we also have -- where most of it is coming in from is either China or Mexico are the two biggest pieces. And we have positions in both market so we can support those. We think we are well-positioned. What everybody else is going to do; they will have to develop their own strategies.

Understood, thank you. Since you mentioned China; hasn't been obviously something you have been talking about in terms of the JV. Any comments there would be appreciated, thank you.

The Chinese market, there is dramatic overcapacity in the marketplace as going on. We have reduced our costs in the marketplace, improved our manufacturing within it. We are upgrading our product line within it to improve the margins. We are getting benefits out of exporting products that make sense to bring to the US and Mexican marketplaces.

We are manufacturing specific products in our plants just for those marketplaces. With ourselves and Marazzi we have sales forces around the world that we think we can utilize those capacities to ship more around the world. And we have opportunities to achieve it. We are not achieving the profitability that we would like over there.

Dillard Watt, Stifel Nicolaus.

Thanks, gentlemen. Good morning. Going back a little bit on your comment about perhaps being a little more or a little less conservative on forecasting acquisitions. Wondering if you maybe could give us an update in terms of have you changed what you think your synergies can be in the various acquisitions, or are we still maybe at the same level? If you could just walk us through the three acquisitions, let us know if there has been any changes to the synergy estimates.

We had a fairly good estimate of what we were going to do with each of the acquisitions. We had a long list of opportunities with each one that we are in the process of executing as quickly as possible. We are moving down those things.

If I had to give you any surprises about the acquisitions, the positives ones would be the US market is doing better than we had expected with Marazzi. The European market we had really anticipated dropping more in sales. We are surprised positively by shipping stuff to other marketplaces to keep the sales up.

The Russian business, the surprise there is the economy was growing probably 4% to 6% higher a year ago and we anticipated the Russian marketplace staying better. So it has declined a little more than we had expected.

The transition with Pergo is going as expected. We hope to come out with new product lines to really enhance the position of Pergo in Europe, because their assets were really outdated and we can significantly improve the value and styling and design we bring to marketplaces in that. That should be executed in the first quarter.

The Spano business we are going through, it is going to take longer because there is more changes in realigning the assets of Spano because the two companies are basically in the same marketplaces. And so there is a lot of opportunities to realign the manufacturing assets. We said we have shut down one line and we have announced the closing of another. There are other opportunities to take advantage of them.

In the businesses in some cases there is some major capital investments that can be done in sum to throw out even older, poorer assets than we are doing. And some of those will take more than a year or more from the time we order them to get them and implement them. So I think we are going right along where we had expected and no big surprises.

Thank you very much.

There are no further questions at this time. I turn the call back over to the presenters.

We believe we are well positioned in the marketplace. We believe the US marketplace is going to keep improving. There is a good chance that Europe has hit bottom and will improve.

We are executing well and I am really proud of our management and how well they are implementing all the changes and adapting to the marketplaces. We appreciate your support. Thank you very much.

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