莫霍克工業集團 (MHK) 2014 Q2 法說會逐字稿

Good morning. My name is Sean and I will be your conference operator today. At this time, I would like to welcome everyone to the Mohawk Industries second-quarter 2014 earnings conference call. (Operator Instructions). As a reminder, ladies and gentlemen, this conference is being recorded today, Friday, August 1, 2014. Thank you. I would now like to turn the call over to Mr. Frank Boykin, Chief Financial Officer. Sir, you may begin your conference.

Thank you. Good morning, everyone and welcome to the Mohawk Industries quarterly investor conference call. Today, we will update you on the Company's progress during the second quarter of 2014 and provide guidance for the third quarter and the full year. I would like to remind everyone that our press release and statements that we make during 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 in 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.

Thank you, Frank. During the second quarter, our earnings per share were $2.08 as reported, or $2.21 excluding unusual charges, an increase of 20% over adjusted second-quarter 2013 results and the highest quarterly adjusted earnings per share in the Company's history. Our adjusted operating income increased 160 basis points as productivity initiatives, cost reductions, price increases and manufacturing consolidation drove higher earnings across the business.

During the period, sales rose 4% as reported or 3% on a constant exchange rate over the prior year primarily driven by the strengthening euro and partially offset by the weakening ruble. Top-line growth was less than we anticipated due to slower improvement in the US housing and remodeling. However, profits were in line with expectations as a result of successful product introductions, productivity improvements and better control. We reduced SG&A costs compared to last year across the enterprise even as we reinvested into the business to promote new product collections and enhance our sales strategies.

Our entire management team is focusing on enhancing the organizational structures, sales and marketing strategies, product collections and operational performance, as well as further integrating our acquisitions into Mohawk. We are continuing to invest in our acquisitions to improve profitability, increase mix and streamline the business and we anticipate these actions will result in even higher earnings as the European and Russian economies improve.

During 2014, we expect our capital expenditures to reach $550 million as we have identified additional opportunities to improve our future results. These investments will support sales and income growth and include new product innovations, upgrading assets of acquired businesses, increase yarn capacity for carpet, greater ceramic tile capacity and an LVT plant to support our growing commitment to this category.

In the US, continuing improvement in the job market and a growing GDP should support a stronger second half of the year. Although housing growth has slowed in the first six months of 2014, it is expected to continue growing from its currently historically low level. Both the National Association of Homebuilders and Harvard's Joint Center for Housing Studies expect residential remodeling to grow for the remainder of the year with pent-up demand driving increased spending. The AIA's architectural billing index rose to a nine-month high in June and the new project inquiry index increased to an 11-month high reflecting stronger nonresidential growth trends.

In Mexico, the economy should improve on its first-quarter growth as consumer confidence hit a seven-month high in May and GDP is projected to rebound to almost 4%. The European Commission is projecting limited growth across the European Union during 2014, citing positive impact of declining deficits, rebounding investments improving employment and continued reforms.

In Russia, the Central Bank is predicting declining economic conditions in the second half of the year, although the forecasted recession has not arrived yet and the ruble has rebounded. As we look at our second-quarter performance by segment, our carpet business adjusted operating income increased 15% over last year as a result of increased productivity, improved quality and cost reductions in operations and administration. Net sales were up 1% and we anticipate improvement in both our residential and commercial categories in the second half of this year. We reduced SG&A costs through systems improvement, lower selling costs and reductions in force that yielded greater efficiency and enhanced customer service. Our investments in new equipment delivered increased productivity and throughput contributing to the profitability of the business.

In the residential channel, the segmentation of our sales organization into retail builder multifamily has improved our execution and we are adding personnel to maximize our brand penetration in the major markets. Investments in new Continuum technology is supporting growth in our product collections made from up to 100% recycled polyester in the mid and value price points. Our patented Continuum process produces a better, cleaner, bulkier carpet from postconsumer recycled content with outstanding stain and soil resistance, as well as more luxurious softness. Our super soft carpet collection such as SmartStrand Silk and Wear-Dated Embrace continue to capture a greater share of the premium carpet category as homeowners upgrade their remodeling projects.

We are also expanding the distribution of our premium Karastan carpets by providing a broader offering and increasing the number of retailers selling our high-end brand. Commercial orders improved through the quarter led by hospitality and corporate sectors. Orders are growing now that we have substantially completed the transition to our own fibers, which deliver industry-leading style and performance and improve our efficiencies and margins. We have reorganized our commercial sales organization into smaller regions segmented by customer type with a complete product portfolio for each channel.

At the annual industry exhibition, our new Breaking Form carpet tile collection was named the best modular carpet with new shapes, colors and patterns that create sophisticated, visually appealing commercial spaces. Our investment in extrusion and yarn capacity is supporting our increased Continuum polyester sales with our state-of-the-art manufacturing project 75% complete at this point. We continue to drive numerous productivity projects across this segment, including operational enhancements, improved SG&A costs and capital investments. Our April price increase was fully implemented at the end of the quarter to cover the raw material inflation we incurred. We announced an additional freight increase in July to cover increased trucking and logistics costs.

During the period, our ceramic segment's adjusted operating income grew 21% due to productivity, volume, pricing and mix. Net sales rose 5% as reported with a constant exchange rate compared to the prior year, which, for the first time, includes the Marazzi acquisition and its comparisons. In the quarter, US sales improved less than anticipated as demand did not rebound as strongly as we anticipated and larger customers adjusted inventories. In flooring retail stores, we continue to expand our ceramic store within a store program with special merchandising and promotions. We will open six additional American Olean and Marazzi combined sales service centers on the West Coast by the end of the year for a total of 16 overall. All of the combined service centers in operation are providing a broad product selection and are attracting new customers to increase our market position.

We continue to grow our relationships with national and regional builders by providing them the best ceramic program available with a high level of local service. The commercial sector is accelerating with hospitality and retail and corporate expected to lead the growth through the remaining part of the year.

Our innovative new collections are leading the market shift to larger sizes, planks and rectangles. We are expanding our Reveal printing technology to mosaic tiles, creating enhanced visuals that coordinate with our wall and floor tile. Our new production line in Dallas has begun operation and will satisfy the increasing demand for ceramic planks and larger sizes. We will transition some Salamanca production to the expanded Dallas facility to free up capacity to support our growing business in Mexico. Our new ceramic plant in Tennessee remains on track to start production at the beginning of 2016.

Across the business, we delivered productivity improvement, implemented enhanced formulations and added new equipment to improve service. We continue to find logistics and productivity improvements across our transportation system. Daltile received the Award of Excellence for ceramic for the 16th straight year in Floor Covering News and ranked first in quality, service and design by Floor Focus' retail survey.

Sales in Mexico are growing significantly and outperforming the market. We are gaining share as we expand the distribution of new products from our Salamanca plant by offering innovative collections that provide market-leading style and value with superior availability. We continue to expand the number of distributors and retailers supporting our brand while growing our margins through improved mix and from our larger sizes and planks.

In Russia, we outperformed the market with sales continuing to grow on a local basis. We overcame slower retail sales through growth in the new construction and DIY channel, with specialized products tailored for each of these sectors. The current Russian economic situation is impacting major consumer purchases, including flooring. The economy has slowed and is expected to be sluggish through the end of the year. For the period, sales and profitability increased on a local basis, but the 11% decline in the ruble reduced our sales and income when translated to US dollars. Sales of our 2013 product introductions continue to grow and have improved our product mix. Our 2014 introductions have been similarly well-received and enhance our position as the style and innovation leader in the Russian marketplace.

During the period, we opened four new franchise retail shops and started up a new production line to support future growth. Through improved production planning, we have reduced inventories and manufacturing costs. We are continuing to improve the Russian organization by enhancing the management team and accelerating sales, manufacturing and system initiatives.

In Europe, our sales and margins continue to progress due to increased sales outside of Southern Europe, as well as growth in Spain and improved mix from larger sizes and unique styling. We continue to lead the European market with ceramic wood planks and have expanded the collection with even larger sizes. During the period, we consolidated all of our wall tile production into our Spanish facility. We have committed the capital to upgrade all the floor tile lines in two plants in Italy by the end of 2015 with the first kiln conversion to be completed during this quarter. In the third quarter, we expect normal seasonal slowing in Europe, but our margins should continue to improve over the prior year from lower SG&A, higher productivity and better mix.

Our European organization has been significantly improved over the past year with the addition of new talent, a single European sales strategy and investments in state-of-the-art equipment. We continue to streamline the organization, refine processes and improve our sales and administrative functions to reduce cost and improve efficiencies. Across our global ceramic business, we are increasing productivity enhancing quality through best practices that improve our cost and throughput. We are leveraging the manufacturing of product strength of our international assets to provide differentiated products in our other markets and give us a competitive advantage.

During the period, the adjusted operating income for the laminate and wood segment rose 21% from acquisition synergies, productivity improvements and cost reductions. Net sales for this segment increased 6% over the prior year as reported or 3% on a constant exchange rate with most of the increase from the Spano acquisition, higher wood flooring sales and growth in insulation board sales. In the US, lower-than-anticipated store traffic reduced the segment sales in line with our other US businesses. Greater participation in the new construction channel drove higher sales of wood flooring. We are successfully leveraging the Quick-Step brand with a new wood collection featuring sophisticated styling, reduced maintenance and our patented installation system.

Productivity and cost initiatives are being aggressively implemented across the US laminate and wood flooring manufacturing facilities. The second wood flooring price increase this year was implemented in July to cover higher US wood and transportation costs. European sales on a local currency were up and flat on a pro forma basis compared to the prior year. Sales were stronger in the Nordic countries in the UK, although softer Western European markets continue to create headwinds. Overall, our wood and LVT categories grew during the period, but were impacted by slower laminate sales. By the end of July, we will complete the transition to our updated Pergo laminate products, which should improve our sales and margins due to their enhanced styling, performance, all with easier installation.

The improved productivity of our Belgian facility, where we consolidated our Pergo and Unilin laminate, is reducing our manufacturing and raw material costs as expected. SG&A expenses in Europe were lowered significantly by improving administrative efficiencies. At our recently acquired wood plant in the Czech Republic, we have invested in new equipment to produce higher-value products under the Pergo and Quick-Step brands. The new wood collections from this facility will be launched in October and will expand our wood business across Europe and Russia. We will utilize some of our Malaysian wood capacity to increase sales in Australia and the Asian markets. Construction of our LVT plant in Belgium remains on target with new equipment being installed and tests underway. We anticipate a longer startup period to allow more extensive testing of our new LVT processes to ensure our high-quality standards. To support our future LVT capacity, we are growing sales in both residential and commercial channels in Europe, the US and Australia.

Our European installation business continued to expand in France and the Benelux region supported by additional production in our new French facility. Our roof panel sales and margins remain under pressure and we announced the closure of a small French plant with production to be consolidated at other facilities. We are also improving our sales organization to maximize the sales of the products in all channels.

The integration of our Unilin and Spano businesses continue to progress with a single salesforce providing a comprehensive product offering to every customer. Many initiatives to reduce costs in our board business are at various stages of completion, including the closing of two manufacturing facilities, closing of a production line, integrating management and administrative functions, consolidating information systems and reducing raw material costs.

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

Thank you, Jeff. Net sales -- we had net sales of $2.048 billion during the quarter, which grew 4% as reported, or 3% on a constant exchange rate basis. We had growth in all segments with stronger performance in the ceramic and laminate segments. Our gross margin was 28.1% as reported, or, excluding restructuring, 28.4%, which is up 70 basis points over last year. We had higher productivity, lower costs and acquisitions that drove this improvement. SG&A dollars were $353 million with 17.2% of net sales. On a pro forma basis, excluding restructuring, SG&A dollars actually declined. Cost-cutting continued to improve results allowing reinvestment back into the business. Restructuring charges for the quarter were $11 million and included $7 million in cost of goods sold and $4 million in SG&A. We estimate there will be $38 million in additional restructuring in the second half of 2014 as we continue to integrate our acquisitions.

Our operating income margin was up 160 basis points to 11.4% for the quarter. Interest expense was $21 million and improved over last year due to our ratings upgrade and our entry into the commercial paper program. Recently, we announced that we will purchase $200 million of our outstanding January of 2016 bonds using commercial paper to fund the repurchase. Currently, we have $900 of bonds at 6 1/8% coupon outstanding. We will pay approximately $17 million in a make-whole premium during the third quarter to buy the bonds realizing some cash savings. This will reduce interest expense by $4 million in the second half of 2014 and $11 million in 2015. Our income tax rate was 24% in comparison to 21% last year. We expect our full-year tax rate to be 22% with approximately 20% in the second half. However, timing of deductions could impact quarters differently.

Earnings per share, excluding charges, came in at $2.21, up 20% from last year, an all-time quarterly record for Mohawk.

If we turn to the segments, in the carpet segment, sales were $780 million, up slightly over 1% during the quarter. We've seen growth from new products in both residential and in commercial. Our operating income, excluding charges -- the operating income margin, excluding charges, was 8.1%, up 100 basis points compared to last year with productivity increases supporting the higher margins. In our ceramic segment, sales were $797 million, a 5% improvement. We had growth in all regions around the world with our largest improvement in Mexico. The Marazzi acquisition continues to benefit top-line, as well as bottom-line results. Operating income margin, excluding charges, in the ceramic segment was 13.4%. That is up 180 basis points due to volume, productivity and mix, which offset startup costs from one of our plants.

In the laminate and wood segment, sales were $501 million, up 6% over last year. Sales were up 3% on a constant exchange rate basis as the euro benefited our results. Operating income, excluding charges, was 14.3% of sales. That is up 170 basis points with acquisitions and cost reductions driving higher profitability.

In the corporate segment, we had an operating loss of $8 million and are estimating a $30 million number for the full year.

If we jump to the balance sheet, receivables ended the quarter at $1.262 billion. Our days sales outstanding for the quarter were 52 days and that compares favorably to last year. Inventories ended the quarter at $1.645 billion. Our days inventory outstanding were 109 days. We were impacted by a slower rebound in demand and some larger customers adjusting inventory levels. We expect to improve our inventory turns in the second half of this year.

Our fixed assets ended the quarter at $2.830 billion and included capital expenditures of $128 million with depreciation and amortization of $84 million. We estimate that capital expenditures for the full year will be $550 million primarily for capacity expansion and to continue expanding or assimilating our acquisitions. D&A is estimated for the full year at $350 million. Long-term debt ended the quarter at $2.4 billion with leverage at 2.1 times debt to EBITDA. We expect the ratio to improve to 1.7 times by the end of the fourth quarter. Jeff, I will turn it back over to you.

Thank you, Frank. During the period, we once again demonstrated our ability to deliver earnings growth through sales improvement, productivity initiatives and leveraging acquisitions. In each of our segments, we are optimizing the efficiency of our operations, the advantages of our leading market positions, the breadth of our distribution and the strength of our brands to grow our business. We anticipate that our sales will strengthen as we move through the second half of the year supported by continued US job creation and improved economic growth. We continue to take appropriate action to pass through raw material and freight increases as required. We are improving efficiencies in manufacturing, logistics and administrative functions and we continue to consolidate operations as needed to reduce costs and improve service.

In the third quarter, we anticipate further improvement in the US market with limited growth in our European and Russian markets. With these factors, our guidance for the third-quarter earnings is $2.38 to $2.47 per share and for the full year $8.09 to $8.25 per share, excluding any restructuring charges. We remain committed to enhancing Mohawk's results and we are optimistic about the improvement of the floor covering industry and our participation in it. We continue to bring innovation to our products and processes to expand our revenues and margins. The integration of our acquisition continues to reduce costs and improve our market position. We continue to pursue acquisition opportunities where we can leverage our knowledge, resources and capital. We will now be glad to take your questions.

(Operator Instructions). Robert Wetenhall, RBC Capital Markets.

Hi, this is actually Desi filling in for Bob. Thank you for taking my questions. Just looking at the ceramic segment, margin performance was really excellent this quarter, 13.4%. You had previously mentioned that you were targeting an operating margin in the range of 13% to 14% longer term. As you integrate Marazzi and realize better productivity levels, do you think there is maybe some upside to your long-term forecast given where the business is currently operating?

I mean one thing you have to look at the annual margin, which we were talking about [revenue] quarterly, since we have seasonal variation through it. So we are still aiming in those ranges as we think on an annual basis.

Okay, thanks. And then also on the SG&A line, you had mentioned the dollar value had decreased as well as the ratio and as we look out towards the back half of the year, do you continue to see cost-reduction initiatives that you can take to maybe keep SG&A flattish or even a little lower in the second half?

We always have initiatives to control our costs and improve them. What we expect is the percent will be down going forward and the dollars will be up somewhat for the rest of the year.

Great, thank you.

Mike Wood, Macquarie.

Thank you. You guys have done a lot of investments driving outgrowth -- you mentioned the new tile printing distributor expansion, other product innovation. Since you haven't had a lot of help from market growth to date, can you give us an indication of what you are expecting from the end-market growth in the back half and what you saw in the quarter, particularly in the US?

So your question is the outlook for sales as we move through the rest of the year?

I know you are going to continue to drive the outgrowth. I am actually interested in what you think the actual markets that you are operating in will grow in the back half of the year and whether or not they were helping you in the first half or this quarter?

We think that the US market is going to improve in the second half. The question is it can improve a little or a lot. We don't know at this moment, which is the reason we give you a range as we go through. We believe that it is going to improve from where it is, but we were more optimistic about it going into the second quarter and as we went through, it didn't rebound as much as we thought, so we have modified our view of the second half slightly because of it.

Okay, thanks. And then in terms of the expanding of the carpet distribution, I'm just curious what the impact is on your current distributor base. And what I am ultimately getting at is why are you now able to expand the distribution? Is it from new product introduction similar to what you did in Unilin in Europe during the volatility there?

What we said was that we were going to expand the distribution of our high-end Karastan brand more. The high-end Karastan brand we treat differently. We make sure that we find the right retailers who can sell better quality products and we are expanding that base is what we meant to say.

Okay, thank you.

Stephen East, ISI Group.

Jeff, can you hear me?

We can.

Okay, sorry about that. You talked a lot about the acquisition integration. If you looked at it and what inning you are in, that type of thing, where do you think you are? And as you move through the process integrating all of this, does this fundamentally change your incremental op margins you think you can get as you go over the next few years?

I think I am going to have to sort of talk you through the different pieces because they are a little different. The Pergo integration is substantially complete at this time, but the European manufacturing is basically shut down and now put in our plants. We went through startup costs in getting them together as we go through, so we are manufacturing the products there, the new productlines are in place. So we anticipate having more productivity improvement in our old plant because it had all the different changes going on in it.

In the US, we are also substantially complete, but we are putting new equipment in; it is being installed this period, which will enhance our capacity, as well as improve our efficiencies. Marazzi US, we have integrated it with the Daltile organization. The organization structures are set up and working and basically the big pieces going forward is to optimize the product alignment by plant and keep continuing to optimize the distribution of both brands through the marketplace.

In Europe, we have put a new strategy in place; the organization is in place. We have been improving the costs, we have new equipment that some of it is just going in this period and it will continue to go in one line after another because we are upgrading as we change all the way through 2015. The new equipment will allow us to reduce our costs, as well as improve our mix further. This is a comment -- in our ceramic business, we are not trying at the moment to drive top-line growth. The focus is on driving margins through the changes in mix and reducing the costs until we get the business performing the way we want it to.

In Russia, the focus in Marazzi is just to improve the organization strength and we've made progress in expanding in the DIY and new construction businesses, which is helping us actually increase our sales in a marketplace that is under a lot of pressure and we continue to introduce new products and we really have a differentiated product strategy, which is giving us higher margins in Russia than the competition and allowing us to outperform the competition.

The last acquisition is the Spano acquisition, which we've already integrated the sale, the management, the systems are all complete. At this point, we have one manufacturing line that has been closed, one plant that has been closed and we are in the middle of closing another plant as we speak. All the changes of the acquisitions are on track. We think they are on plan to achieve what we want. We think there is more opportunities in the margins and the sales top line as we go forward.

And then, Stephen, I will just address the last part of your question regarding incremental margins. We don't expect the incremental margins that we've talked about in the past to change. We will add to the profit dollars, but that 20%, 25% and 30% margins that I gave you for the carpet, tile and laminate businesses we think are going to stay in that same ballpark.

Okay. That helps. And Jeff, if I just look at Marazzi, just listening to you talk, is it fair to say you are probably halfway through or so on that? And then the other question that I had is just on the M&A front. Are you all still in a reactive mode there? Are you now proactive and you talked a little bit about where your debt was now? I guess how much debt capacity do you have right now or you would be comfortable going, that type of thing?

We've made huge progress as we just talked about the acquisitions. Our balance sheet is in good position, as Frank went through the ratios before, which allows us to pursue acquisitions. I think the management is in position to take on other things and the balance sheet sure is. We continue to assess opportunities around the world, but you don't have them until you conclude, which you never know when and how that is going to go along. Acquisitions are a core part of our long-term strategy and we believe we are highly competent in bringing them in and putting them together.

And then with regards to how much additional debt or leverage, as you know, in the past, what we've done is, as we have bought companies, we have levered up and then as we have integrated them and generated cash, we have brought our debt and our leverage down and that would continue to be our strategy. We are at about 2.1 times debt to EBITDA right now and we could go up maybe to 3 times, somewhere around there.

And we will continue to pay off debt as we go through the year.

Okay, all right. And Jeff, if I could just sneak in on that, any preferences geographically or productwise as you think about it right now?

Our preferences are for return on investment.

Fair enough.

Dennis McGill, Zelman & Associates.

Thank you, guys. I guess the first question, Jeff, do you think there is anything to the notion that flooring being more of a planning category, an interior category that with the harsher winter and kind of later break to spring that it just got kicked out and now you are in the summer period, people are thinking outdoors, so it is really not until the fall that you get back to that remodeling push?

If we go back over the history of our industry, it tends to be slow from about the first part of January -- December because you can't get it in before the Christmas. It tends to stay there until you come out. It starts picking up in February, March and it tends to run fairly level all the way through the rest of the year down and then the things that have impacted it -- lately, the economy impacts it, so I don't see a dramatic change to seasonality other than the normal things that we go through.

I guess the question is, and I realize it is hard to quantify, but do you feel like that normal seasonality that got kicked out got kicked out further than 2Q into 3Q or just completely got eliminated?

In our own business, I can only answer that we've seen the normal seasonality. It just didn't jump like we expected it to jump from our core thesis in the first quarter. It is still important as we went from first quarter to second quarter. It is just that we thought the category would have picked up more than it did.

Got you. Okay. And then the comment you had made on retail, I think that there was some tightness in inventory and maybe some weakness in traffic. Have you seen that change at all thus far in the third quarter?

The trends we are seeing are, as we said, is that the second quarter wasn't as good as we said, but it is better. We are anticipating the third quarter and the fourth quarter to improve from here.

Okay, best of luck.

Michael Rehaut, JPMorgan.

Thanks, good morning, everyone and nice quarter. First question I had was just going back to your expectation for a little bit of strengthening in the back half in terms of year-over-year growth versus the first half and just wanted to get a sense if that was based on just perhaps easier comps at least as it relates to carpet in the second half versus the second quarter or some bigger macro drivers or other types of drivers that you see in your business?

I guess what we evaluate is a lot of things we put together in trying to estimate the future. We get input from our own people what they are seeing. We get input back from our customers about how optimistic they are about it. We watch the trends that we are doing and we believe we are going to see an improvement of it. We are not expecting it to jump through the ceiling, but we think it is going to improve and we will find out.

And I guess also with the second quarter itself, you did note that sales were a little bit below, but you had several drivers that offset that. Just conceptually here, are we thinking perhaps that the delta in sales was maybe a point or two of growth that was offset by the new products and productivity and cost controls? If that were to occur in the back half, do you think you have sufficient momentum in those offsetting drivers to continue to allow you to make your guidance?

I guess going back to the second quarter, somewhere between 1% and 2%. We had expected to grow probably 1% to 2% more than it actually did and we have taken that into account as we have estimated the future.

Okay. And then just lastly, you continue to have good margin expansion on the carpet business despite first quarter was down year over year in terms of revenue, second quarter up only 1% and yet you are still showing some very nice margin improvement. Just wanted to revisit what the biggest drivers of that were. Last year, I think the big driver in margin improvement was the positive mix in your residential business with some of the new products and fibers that you rolled out. As far as I understand, that has continued to a degree in residential, but also expanded into commercial. And so just wanted to get a sense if that is -- you have listed several things that have improved the margins, but if that is still the bigger driver of the mix and how to think about the impact of those drivers going forward, if they would eventually moderate or if you continue to see more in the kitty?

First is that we spent the last few years upgrading our organization, changing some of our strategies and both from a product standpoint and a sales standpoint to improve our margins, which we knew we had to do. Those things continue and haven't changed. The margins in the business, we have hundreds of productivity things going on at all points in time. We are very structured in how we identify them and execute them through the business. It improves both our quality, as well as our cost in the different pieces. We have, with the changes we've made, we've put -- the majority of our people we consolidated together in a single building so that we can communicate better. It allowed us to actually reduce the number of staff that we had. We have become more focused on making sure that we don't do a large number of initiatives, but do the initiatives that have the most benefit. So we have reduced the number of activities, but put the focus on ones that have higher value to the business and to our customers. All those things continue to pay off in how we go to market.

So are you saying then, Jeff, and I don't know, Frank, if you can weigh in on this as well, that at least the first half of this year in carpet, the bigger driver of improvement then are you kind of pointing to more on the productivity front than the cost control front because it was my understanding that at least last year the bigger driver was the positive mix?

So I would say the bigger driver this year -- you're right, last year, mix was a big driver. The bigger driver this year in margin improvement is productivity improvements, cost control both in manufacturing and in SG&A. And then mix probably was a little bit of a headwind. We had some volume improvement that helped us in the quarter a little bit. The volume improvement helped us in the quarter as well.

So mix actually a little bit of a headwind this quarter?

A little bit, yes.

As we grow our business in the mid to lower end, that is going to impact the mix a little bit.

Okay. Thank you.

Sam Darkatsh, Raymond James.

Good morning, Jeff, Frank, how are you? Just following up on that last question, so if mix was a negative driver to carpet margins in the quarter, I guess what that could infer is that overall polyester grew faster than the nylon. Is that a fair statement?

Definitely.

Okay, just making sure -- there was no material slowdown in polyester demand in the quarter best you could tell then?

We are participating more aggressively in the polyester market, but with that, we still improved our margins of the total business by about 15%. The polyester market should continue to grow. We don't see the growth in the category slowing down and we are -- we have introduced products and we have invested in our manufacturing facilities to make it at competitive prices in the marketplace. But, again, the margins in the lower price point products are typically lower than average, but not unusual for those price points, which we've always participated in.

Understood. And then my final question also with respect to carpet, specifically on the residential side, did you -- best you can tell, did you gain share versus the industry in residential? And I think there may have been some benefit in rugs. I think that Shaw may have walked away from the rugs business earlier this year, so I'm sure there was some benefit to you on that. If we look at carpet specifically, how would you gauge your performance in carpet versus the residential industry?

I think that we probably did a little better in the residential piece. We probably did a little worse in commercial because we were still concluding the transition that we had and then your comment about the exit of my competitor, we really haven't gotten benefit because they had a huge amount of inventory they had to push through the system as they exited the business.

Might that be a material growth opportunity for you over the next several quarters?

Our rug business did improve in the quarter. We are expecting it to continue improving. We have introduced more differentiated products using our raw material strategies to differentiate them in the marketplace and it is also improving our mix. So we are assuming that -- we believe we are going to have improvement over the next six months or a year.

Thank you. Thank you very much.

David Goldberg, UBS.

Good morning, it's actually Susan for David. Can you talk a little bit about the promotional environment and given the slowdown, did you see any changes there? And with that, are you seeing that consumers are reacting any differently to them? So are they becoming any less or more effective in getting them to actually get out there and make the purchase through the project?

There was some more promotional activity in the period as both retailers tried to drive traffic into their stores and as manufacturers tried to even out the capacity with the sales that are going on. It's hard to break it apart to tell what impact it had. I know the end result was the industry didn't increase as much as we had hoped. It's difficult to tell what the government policies, tax changes, a lot of other things also had on the individual consumers.

Okay. And then in terms of sort of a bigger-picture question, your growth was really impressive despite all the sort of puts and takes that you had this quarter and as you look further out, it's still relatively impressive given what is going on. Can you talk a little bit about the role of the US and growth in the US in terms of the broader picture now that you've done all these acquisitions and you have a much broader international kind of footprint?

Oversimplified, about 65%, 70% of our business is based in the US and the other is in the other marketplaces. Each of the markets are a little different. We are expecting the US business to improve more in the near term than our European business or our Russian businesses. Our Mexican business in ceramic is doing well as we spent the money two years ago or more to put in new capacity. We've changed our productline. So it is growing at significant rates. We think these trends will be in each place. As we talk about the acquisitions, each one is a little different. The European ceramic business, we are really focused on driving margin and changing their mix and cost structure and that will continue over the next year, year and a half.

The Russian marketplace is suffering a little bit and I think we are well-positioned because we are positioned as the style and design leader in the marketplace, as well as owning the distribution and having over 300 franchise stores helps us push product through the marketplace. So I think we are going to gain share, but the profitability of the business we are going to give up a little as the market gets a little tougher, but we use that to gain share over the next six months is our plan. And the real big opportunity is how much is the US going to increase. And I think we have a pretty good estimate of it. It could be a little better, it could be a little worse as we go through the year.

Okay, that's very helpful. Thank you.

Mike Dahl, Credit Suisse.

Hi, thanks. Jeff, I think you've talked about -- mentioned the reductions in force. I'm curious where specifically that was impacting and is this something that was contemplated as part of the overall integrations or is it something that you may have had on the shelf and hit the button on when the market didn't turn out to be quite as strong as you anticipated?

Yes to all of those. The acquisition pieces, we continue to adjust the organizations as we've put them together and as we move through it, we continue to make adjustments in them. At the same time, we talked a minute ago about the carpet management organization. We consolidated it into a single building, which was spread out over a lot of them and in doing so, we were able to reorganize it, but it also got the benefit of the last one or two years of changing systems and processes. So we actually reduced the SG&A there. We continue to look at our sales organization and make sure we are maximizing the pieces and we constantly adjust the sales strategy in order to get the products to market and it is in all the businesses. In the Spano acquisition in Europe, we have gone to a single salesforce where we used to have two in each of the businesses. And we have done the same thing in other areas as we go through. We continue to challenge the methods we go to market and we try to find better ways of controlling the costs in SG&A on an ongoing basis.

Great, thanks. And then, secondly, I wanted to ask about LVT and just any update on how you are thinking about as the new capacity comes on? It seems like a lot of others are bringing on capacity more or less around the same time. Do you think the market can handle that domestically? Do you worry about increasing price competition? Any thoughts there?

Yes to all of those. Basically the production in the US is being imported from China, so there is going to be capacity put in the US and there is going to be a battle that goes on between moving it into the US marketplace. Usually local production, if it is put up in the right capacity, can compete because of its flexibility in the marketplace and if you can have it at the right price. So the question is going to be look at the capacity coming in, there is multiple ways of making this stuff. There are going to be different strategies of equipment, there is going to be different strategies of go to market, there is going to be different capabilities in style and design. And we are starting out that our first plant is being put up in Europe, we are going to use it to supply some of the stuff here. The European plant by the end of the year should be operating and then the question is going to be when do we put up the second one and the third one in our different regions, which we participate in. While that is going on, we are importing product and selling it into all the different marketplaces. And we think we are getting ourselves positioned properly.

Okay, thank you.

Kathryn Thompson, Thompson Research Group.

Hi, thanks for taking my questions today. The first one is really more focused on your US or North American business. During this year, the first half of this year, broadly speaking, are you seeing differing performance in terms of the sales momentum of higher-end price points versus lower-end price points? And then also along with that if you could discuss the willingness of the market to accept pricing and has there been any change relative to historical performance? Thank you.

In the quality pieces, there is some improvement in the higher end of the business and so there is some mix improvement from it. However, at the same time, the new construction of moderate homes is also growing, which tends to use lower quality products because they are trying to get the home built for the least cost, so there is a mix thing between them as you go through what is going on. The multifamily business is doing well. It tends to be at the lower, so the average mix through it I am not sure has changed dramatically, but it is because of the growth at the high end and the low end. The middle piece is what hasn't rebounded as much as it should. We are expecting over time for that middle area to improve. I forgot the second part.

The other question was price increases and market acceptance of price increases.

The marketplace never likes price increases. We have put in and have executed the price increases in the different markets that we have. In the carpet segment, we have increased the prices they are in. We did not change the prices in the commodity part of the carpet business, in that one. We have put in price increases in the wood business where the wood has been going up significantly and they have been going in. We put in price increases in different parts of the business as required in all the different product segments. There is also a thing going on with the transportation costs. As the US economy has improved, it has gotten tighter in the transportation and so we have had to raise the cost of the transportation in all the different product categories also.

Great, thank you. And just to be clear on that commodity portion of the carpet, at least the pricing degradation that we saw earlier this year, you have seen stabilization and pricing there, is that correct?

The commodity business has always been and continues to be [low] differentiated products, easy to move and there is always price pressure on the commodity business when business doesn't reach the level that you want. No different than anything and it tends to be in spot deals as you go around. And it is the same thing for all our product categories.

Along that line, you have added some capacity. One of your competitors is continuing to add a bit more capacity on that lower end. How does that, when you think about strategically over the next 12 to 24 plus months, how does that change your thinking about pricing in that commodity portion of the business and do you see it is a meaningful threat or is it just part of managing your day-to-day business as you come off of a deep construction downturn?

There is new capacity going into the industry by multiple players. It has been going in over some time over the last couple of years. It's not a new phenomenon. At the same time, all the capacity isn't new to the industry because, in some cases, there are other product types that the capacity is going out of the marketplace, creating some needs to offset it as the market changes and customer desires as you go through. At the same time, I think the industry and we are expecting improvement in the volume of the industry, which is going to need more raw materials to support it, over the last five years, there used to be a significant amount of nylon staple in the marketplace, which has just about disappeared. There used to be polyester staple, which has declined significantly almost to zero and the polypropylene category has also declined. So there is multiple things happening as the capacity is going in to satisfy it.

Okay, that's helpful. And then finally, thank you for giving color on restructuring for the back half of this year. How should we think about restructuring charges as we enter into 2015? I assume it will largely be behind you.

I don't have those in front of me where they are.

We don't have those numbers here in front of us. There will be some more restructuring. Jeff talked a little bit about continuing through 2015 on some of the work that we are doing. So there will be some more charges next year.

Will it be at lower magnitude just generally speaking in 2015 versus 2014?

They should be.

Yes, they should be, but let me, before I weigh in, look at the numbers on that.

We will finish those when we go through our plan in the next quarter or so.

Great. Thank you so much.

Stephen Kim, Barclays.

Yes, thanks very much, guys. Obviously congratulations on a strong quarter. I wanted to talk to you a little bit about the synergies and the productivity initiatives that have spun out of your acquisitions that you've made and in particular what I am intrigued by is some commentary from you that the initiatives and the integration has gone on track and yet you've upped your restructuring guidance it looks like about $20 million for the back half of the year. And you said that you have incorporated a more conservative outlook because you didn't get the bounce back from weather that you thought and yet your guidance didn't change. So if you put all of that stuff into the hopper and what it seems to suggest to me is that the overall basket of opportunity of savings and benefits from these acquisitions is maybe bigger today than, as we look out, than maybe what we had (technical difficulty). So I was curious if you could sort of frame your commentary around that. Have you encountered as you have gotten deeper into these integrations more things that have sort of reinforced the value of these acquisitions in your mind?

So Stephen, I would say the increase in restructuring that you saw in the second half is really some activities that we maybe pulled out of next year and put into this year in terms of restructuring for these acquisitions. It really doesn't change in terms of our savings, synergies, etc. that we thought we would have at the beginning of the process and where we are right now. If you look at the total number, I'd say the total hasn't changed. Parts and pieces probably have. We never end up with what we start out thinking, but I would say that in terms of the total numbers that we talked about a year ago that those haven't changed.

So what I'm hearing you say then is that since you have upped your restructuring charge guidance for the back half of the year and since the environment overall has weakened a little bit, you didn't get the snapback from weather and yet your guidance remains the same, really what it sounds like is we should be thinking that you are pulling -- you have pulled some earnings out of next year and into this year. Is that what I am hearing?

No, no, no, we didn't do that. We didn't pull earnings out of next year and put them into this year. We are moving more quickly on some of the activities.

Okay, that's fine. The other question that I had relates to your wood flooring. You've talked a fair amount about it, about price increases going into offset material cost inflation, etc. I was curious if you could talk a little bit about the difference between the solid and the engineered wood flooring. Generally, if there is a significant difference in what has been the dynamics that have been occurring between those two in your view and if you could help us understand to what degree your US wood flooring business relates or has synergies with to your European flooring business?

Let's see, the European and US flooring businesses, I mean other than having best practices that you put between them, I mean it is not anything alike. In the European business, we have a small marketshare. We are focused on the engineered wood. We have been making it in Malaysia and using the Malaysian plant to satisfy the European market, the Asian market and the Australian market. We have purchased a new plant that will make products similar in Eastern Europe and that is going to enable us to expand the business, but we are still a very limited share and it's a niche position and we tend to focus on the mid to high-end part and we are using our brands to create a premium position within it.

In the US business, we have a different strategy, which is made up of an engineered business as well as a solid business. We participate in the breadth of the marketplace in both categories from high to low and the marketplace is significantly different than it is in Europe.

And the trends that you have seen in the US between engineered and solid, is there anything important to talk about there?

Our business is increasing in both. The solid business tends to be a higher percentage in the new construction business. The raw material costs affect the solid business more. So what happens is you've had a spread of the prices between similar products in solid and engineered has gotten larger and so it costs more. Over time, it should impact the marketshare of those because you have to pay a higher price for a similar product as you go through. We think the wood business in flooring is perceived as one of the aspirational purchase. We think it has got a nice position within the marketplace. However, you are also seeing various alternatives. In the ceramic business, the fastest-growing part of it is ceramic planks that look like wood and it is growing dramatically as you go through. So that is a relative new competitor to it. You have LVT in the marketplace that is getting bigger. It is becoming a competitor to people who want that visual look and then you have laminate that has been there for a long period of time. So there are a lot of options that are going to play out over the next few years.

Great, thanks very much, guys.

Eli Hackel, Goldman Sachs.

Thanks. Good morning. Jeff, I know you talked a little bit before about expecting the US to improve. Maybe just from a high level, what is your view just broadly on the US consumer, sort of an open-ended question, but if you talk about high-end consumer versus low-end or however you would want to characterize it? Just curious your topdown view of what the US consumer looks like?

I guess we're surprised from our category that there hasn't been a larger rebound in the remodeling business. We would have thought -- and historically as the consumer gets more confident, they start spending more money on their home and we just haven't seen the rebound -- we have seen it, but not to the extent that we would have. The new home business, we are all looking at the same numbers and I guess we were surprised that the new home sales building relative to what it was, we thought it would be higher than it is. And the question is is it a momentary thing or is it going to reverse. The one thing we are sure of is the long-term needs for new homes is much higher than it is today and at some point, it is going to have to equalize.

Another part of it is the young adults that are coming into the marketplace, you have this overhang of debt that earlier generations didn't have from their education and it may be causing them to postpone what they did until a future point. And then overlaying on top of it is a lot of young people have gone through this recession and you don't really understand how it is going to change what they purchase and how they act in the future. So there are a lot of variables going on that we will all get to see how they play out.

Great, thanks. And then just one follow-up, Frank. What is the impact of currency in your guidance for the second half of the year?

I don't have that here in front of me, Eli. Let me get it to you after the call.

Okay, thanks very much.

Eric Bosshard, Cleveland Research.

Thanks. Two things. First of all, the stepped-up CapEx, I think it stepped up last year and it is stepping up significantly again this year. Could you just talk a little bit about how you think about the payback within that and the impact on returns from those efforts?

Absolutely. One part of the payback has to do with the acquisitions, upgrading those and integrating them into the business is a portion of it. Then the second piece is that some of our categories we are anticipating longer-term growth and so we are investing in new equipment to satisfy that such as the new plant in Tennessee we are putting up. We put new lines in Georgia, we put a new ceramic line in Russia and so part of it is getting to have enough capacity to supply the demand that we see.

Then the last part is all around taking existing equipment and replacing it with new technology that is better than the old technology, which all gives payback. The paybacks could be anywhere from two years to five years depending upon which category it is and what it is. In addition, we have, like going into the LVT as a new business, so that is about $50 million that is going into it this year to get -- to go into a new product category.

The benefit from this when you look back a couple years from now, is this a meaningful benefit in terms of incremental revenues and incremental opportunities on margin or is this things you have to do to sustain where you are?

We are expecting them to have a positive impact. Part of the reasons the margins are growing this year, as you see them, is the investments we made last year and the year before.

That is helpful. And then the second question just relates to how marketshare is evolving in flooring and you spoke to this a little bit with engineered floors, but as you look at the carpet business and your laminate business relative to what is going on with engineered and with LVT, how do you think about how the landscape is changing with your portfolio and its market position relative to where the market is evolving?

If you look over the entire flooring category, my expectation is that flooring will grow faster than GDP over the next couple of years. In those pieces, you look at the segment, I would believe that ceramic would be higher than the average. I have laminate and carpet being lower than the average. LVT is a new category, so it is coming from a low base and it should continue growing because the base is relatively low. And then wood, wood depends a little bit on price versus unit. There's been a huge inflation in wood due to the raw material, so a large part of the wood growth is in price inflation. So if you take that out, I would guess it would be somewhere in the middle.

Okay. And those are probably similar answers except for LVT to the last couple years. Is the intensity of any of those materially different?

No, I think the trend is just continuing as they have been.

Okay, that's helpful. Thank you.

David MacGregor, Longbow Research.

Yes, good morning, everyone. Nice quarter, Jeff. I guess, first of all, the commercial business, you talked about order growth both in carpet and ceramic. Is there any chance of getting you to quantify that order growth heading into the second half?

No.

We don't give that out.

Okay. Is the commercial business kind of where you want it to be as a percentage or as a proportion of your overall enterprise today?

We don't really look at it as a percent of the enterprise. What we look at is how it maximizes each channel that we are in and we don't have a limitation that says this one needs to be X versus the other.

So as you stack up those priorities and you look at the marginal efficiency of investment in each, does the commercial business -- how does it compare versus residential in terms of incremental investment?

Incremental investment? A large part of it -- I have to answer it two ways. In some cases, a large part of the assets can be utilized in either or and then some of the assets are unique to commercial because, in some cases, there are some differences. So like the plant we are getting ready to put up in Tennessee, some of those assets will be focused on driving commercial business, which is made out of a different body formula than the other and it has some different pieces in them. In some cases, there's some [content] technologies that are different, but then when you move away from that, there is a huge part of the asset that can flip between either or as the demand is needed.

Thanks for that. Maybe I can take that up with you offline. The follow-up question I had was really back to the conversation around LVT and it just seems as though this quarter you saw strength in LVT. Your laminate business was down. As we talk to channel contacts, it seems like that is happening across the industry where laminate is becoming a bit of a victim for growth in LVT as the substitution effect plays out. I guess just longer term do you feel you can grow your LVT business fast enough to offset any potential deterioration in laminate from that substitution?

They are not all substitutable. If you look at the average price of laminate versus the average price of LVT, they are really at two different price points. LVT is much more expensive. LVT also has -- probably a large portion of it is going to end up in the commercial business, which a very limited portion of laminate ends up in the commercial business as we go through. So they are not exactly -- the products aren't substitutable one for the other.

I think that LVT is going to take and impact a little bit of a lot of things. I think it is going to impact laminate, the higher-end laminate piece somewhat. It is going to impact some carpet in some instances where it is substituted for it. It may end up as a piece for ceramic, but again the value proposition in each one of these things are different, but if you just look at the total market, I think you are going to take bits and pieces from all of them, including wood.

Okay, thanks very much, Jeff.

John Baugh, Stifel.

Thank you and it was a phenomenal quarter. Congrats to the team. Just real quick because this is dragging. Russia, I haven't done my channel checks yet, but what are you thinking about second half of the year there? What are you assuming, are you assuming negative sales and/or profits or continued sales and profits and any way to think about the risk or exposure there if the recession really does hit? Thank you.

We are thinking that the Russian economy is going to slow further, that the ceramic business is going to decline, that we are going to attempt to take marketshare in it and our percentage margins will go down as we do that.

And so that would translate to an overall profit number second half year over year in Russia, flat, negative?

I think that we would probably end up on a margin piece maybe flat given that we are trying to push that up and then the translation, your guess is as good as mine. I have no idea where the ruble is going to go.

Great, thanks. Good luck.

Kenneth Zener, KeyBanc.

Good afternoon, gentlemen. You touched -- you mentioned the ABI index, which can be a very vague indicator for demand. Could you give us a little flavor for what you are seeing in the domestic commercial market, which I believe for you guys obviously in the tile piece (inaudible) carpet specifically is more retrofit? So is it that you are seeing growth because you are gaining share, which certainly sounds like given your product innovation? And could you also give us a sense of what you are seeing in the end market and how much that is driven by the product you are replacing being just worn out, is it style, discretionary purchase? Just give us a little feel for that commercial channel please. Thank you very much.

When we talk about commercial, I have a ceramic business and a carpet business that are all going into the channels in different ways. They tend to go into different places. My ceramic business has been increasing. We have a competitive advantage with the breadth of our offering and pieces as we go through our styling and design and we have been growing that relative to the marketplace. We believe we can continue growing it. We have some advantages of owning higher ceramic that makes unique things in Italy and in China that we bring in to support that as we go through to give a much broader offering.

The carpet business we have been lagging as we have changed our entire productline to go through and have a different raw materials strategy within it. We think we are at the end of it and we are expecting our business to grow in it. As we look forward, the inputs we are getting back from what we are seeing, we are hopeful that there will be an improvement in it going forward, but again our view forward is still limited.

Thank you.

Keith Hughes, SunTrust.

Thank you. Just to finish off, you talked about improvement a lot on this call in the second half of the year. Are you seeing any improvement here in July? Has carpet or any of the business orders picked up from the trends you saw in the second?

In the second quarter, we have two things. One is we started out -- we thought we had a more optimistic view of what was going to occur, which didn't. On the other hand, it did improve seasonality and continues to improve seasonality-wise. It's hard to read the pieces because there is a lot of -- from week to week, it is not a straight line and it makes it hard to read on a short-term basis. The indications we have we believe ours will be better.

Okay, thank you, Jeff.

There are no further questions at this time. Presenters, I turn the call back to you.

We appreciate you joining us. We think we have a strong management team and the right strategy to run our business for the long term and we are optimistic that the second half will be better and continue to be that way. We appreciate you joining us. Have a nice day.

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