莫霍克工業集團 (MHK) 2015 Q2 法說會逐字稿

Good morning. My name is Mike and I will be our conference operator today. At this time, I would like to welcome everyone to the Mohawk Industries second-quarter 2015 earnings conference call. (Operator Instructions). As a reminder ladies and gentlemen, this conference is being recorded today, Friday, August 7, 2015. Thank you.

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

Thank you Mike. Good morning, everyone, and welcome to Mohawk Industries' quarterly investor conference call. Today we'll update you on the Company's results for the second quarter of 2015 and provide guidance for the third quarter.

I'd 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 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. Jeff?

Thank you Frank. During the second quarter, Mohawk's performance was strong, particularly when considering the currency headwinds we face. For the period, our earnings per share were $2.69, excluding unusual charges, the highest quarterly adjusted EPS in the Company's history.

On a constant exchange basis, revenues grew across all segments with second-quarter net sales increasing approximately 7%. Our adjusted operating margin was approximately 14%, an increase of 21% or 240 basis points compared to the prior year due to the performance of our differentiated products, higher volume, improved productivity, and costs across the enterprise.

In May, we completed the purchase of KAI, the leading position in the Bulgarian and Romanian markets as well as positioning us as a low-cost producer. In mid-June, we completed the acquisition of IVC, providing us with leading positions in luxury vinyl tile and sheet vinyl on both sides of the Atlantic. For the period, the two acquisitions were more accretive than we anticipated to EPS.

The IVC and KAI acquisitions have compelling long-term potential and expand our business into new product categories and new markets. In both acquisitions, we gained best in category management teams to implement our strategies and optimize the use of Mohawk's assets and knowledge across the enterprise.

To maximize our growth, we've invested more into the businesses, including developing differentiated products, hiring more salespeople, increasing our product sampling and merchandising. Our capital investments are adding capacity where needed to meet growing demand and increasing our margins through improved efficiencies and reduced costs.

Even while we significantly invest in the business, we are generating higher cash flows. We continue to refine the management of our inventory, which improves our working capital turnover and benefits our service levels. As expected, material prices improved, allowing us to recover some of the margins we'd previously lost to inflation. Going forward, our investments in acquisitions and our existing businesses will position us to further expand sales and improve margins with design leadership, operational efficiencies, and distribution advantages.

During the period, the US economy strength was reflected in an increase in new housing construction. In June, existing home sales rose to the highest level in eight years, which supports the Harvard LIRA projection for stronger remodeling investments in the future. An improving US job market continues to support strong consumer confidence and should increase consumer spending. The consensus among commercial construction forecasts is for continued growth with hospitality, office, and retail sector leading overall spending.

Mexico's GDP growth is projected to continue with a rebound in residential construction contributing to higher ceramic sales. Now that the immediate Greek crisis has been addressed, Europe appears likely to maintain the momentum created by lower interest rates and more private sector loans. The Russian economy remains challenging with significant inflation although government actions, including lower interest rates, subsidized mortgages and new infrastructure investments, should provide some benefit.

During the second quarter, the Company realigned its reportable segments, organizing its carpet, wood, laminate and newly acquired vinyl operations by geography into flooring North America segment and the flooring rest of world segment.

Our global ceramics segment remains unchanged with the addition of KAI in Eastern Europe. The management of the business has been realigned with this change and will allow us to optimize our operations and sales by region while coordinating our technology, manufacturing, and product development across the enterprise. We expect to gain synergies through enhanced customer relationships, better utilization of our assets and distribution systems, and the implementation of best practices.

And with that, I'll review the second-quarter performance by our segments. As I mentioned earlier, we've continued to operate our global ceramic businesses in the past with all of our locations under one umbrella in order to optimize our design and technology resources and balance our manufacturing capabilities around the world. On a pro forma basis, ceramic has become the largest product category in our portfolio, constituting over 35% of our total revenues.

For the quarter, our global ceramic segment's adjusted operating margin was approximately 16%, up 220 basis points as our mix, volume, and productivity improved. The segment sales were down 1% as reported or up approximately 8% on a constant exchange rate, including two months of KAI's results in the quarter. Our US ceramic business continues to build momentum across all channels with stronger growth in residential new construction and commercial sectors.

Our Marazzi acquisition has now been completely integrated and all functions in the business are working under a unified strategy. By utilizing the expertise of our global talent, we are leading the marketplace in innovative design, which is differentiating our products and improving our mix.

This year, we are on track to place our Statement ceramic boutiques in more than 250 of the country's top retailers. We are continuing to expand the exclusive agreements to supply the nation's largest builder and multifamily businesses.

Our broad product offering is allowing our distributors to meet customer needs without the inventory burden required when importing products. Home centers are increasing their focus on ceramic and we are gaining share in the channel. As the economy improves, the commercial category continues to gain traction with hotels, restaurants, shopping centers and schools investing more to improve their facility. We are adding sales personnel, service centers and showrooms to maximize our US sales and are utilizing our worldwide assets to supplement our local production.

The construction of our new Tennessee ceramic facility continues to progress and the installation of equipment has begun. We have recently completed the acquisition of a small ceramic plant in Baja, Mexico, which will expand our position in western Mexico and in the southwestern United States market.

In Mexico, our sales continue their rapid growth as the economy expands and we grow our market share. During the period, our new product introductions positively impacted our mix and margins. We're leading the market in realistic wood and stone designs, larger sizes and specialized designs. We continue to grow our distribution footprint and increase the specification of our products on new projects.

In our European ceramic business, our investments have significantly improved our product offering, sales and margins. During the period, our new collections represented 40% of sales as we continue to aggressively discontinue older, underperforming collections.

Three new production lines in Italy started up during the quarter and are operating well as volume and yields increase ahead of our plan. We anticipate that the second phase of our planned equipment upgrades in our European ceramic will be completed in the third quarter and we have ordered additional equipment for the next phase.

Just as we led the industry in the introduction of wood ceramic planks, we are now setting the styling trends with smaller sizes in blocks and hexagon shapes and creating an increasingly popular outdoor thick tile that competes with natural stone.

The KAI acquisition expands our Eastern European business and creates opportunities to ship KAI products into other markets. A new production line with digital printing has just been installed in Bulgaria and we have identified process improvements and best practices to refine the capabilities and efficiencies of the KAI operations. We are planning to implement our existing business systems into KAI to provide greater control, identify opportunities and increase responsiveness to customer needs.

The Russian economy continues to decline, creating pressure on the country's ceramic industry. Our second-quarter revenues were up on a local basis as we grew market share in a contracting environment. Inflation caused by the weak ruble has reduced European imports into the Russian market, increasing our ability to gain market share through greater participation in the DIY and new construction channels and by pursuing additional sales in the value categories. We have increased prices in the market by 10% but have not covered all the inflation we have incurred. Our new product introductions are enhancing our average selling price and we are seeing significant growth in our higher-end porcelain products. We are investing to expand distribution in our franchise and Company-owned retail stores and we are planning an expansion of our manufacturing capacity of larger sizes and premium commercial products.

During the period, our flooring North America segment adjusted operating income increased 40%, achieving a margin of approximately 12%. All product categories contributed to the increase through productivity and lower costs offset by mix and the startup of costs related to our new US LVT plant.

Segment sales increased by approximately 3%, including about three weeks of IVC North America results.

Raw material prices have not changed with the recent oil decline and we anticipate that the second-half material purchase prices will be stable. Compared to last year, we expect to have a margin benefit as costs flow through.

Our SG&A was slightly higher in the segment as we increased investments in both our residential and commercial sales forces as well as new merchandising to showcase our products. We'll continue increasing our investments in new sales personnel and product samples throughout the second half of the year.

During the period, sales of carpet, tile, laminate, wood, rugs, and vinyl increased with broadloom carpet down slightly. Mohawk soft surface sales performed in line with the industry but were slower than anticipated as soft surface residential remodeling continued to lag and the growth of polyester lowered our average selling prices.

Our commercial broadloom sales were temporarily impacted as we transitioned from our high-cost manufacturing process to a more efficient one. This change enhanced our margins but temporarily released sales growth as we dropped a higher number of products.

Our premium Karastan builder of multifamily product categories in hard and soft surfaces are performing better. Our new residential carpet introductions are gaining traction and should improve our remodeling business. We anticipate these products will enhance our performance at the mid- to high-end price points and improve our mix in the second half.

As the market gains traction from increased consumer traffic, our rugs sales improved due to innovative designs and proprietary fiber technology. We are implementing a new mat technology which will extend our product offering and increase our participation in the commercial and utility mat category.

We continue to deliver strong growth with our carpet tile squares and planks. The sales of our new Duracolor high-performance carpets are expanding rapidly and improving our margins. At the recent NeoCon show, we were recognized for our new introductions in both broadloom and modular tile and we won the top product design award at the National Hospitality Show.

Our service levels as well as internal and external quality continue to show improvement. This quarter, we announced the closing of a yarn manufacturing facility, initiated a consolidation of our woven manufacturing, and eliminated four regional warehouses. These initiatives should be complete by the end of the year.

Our logistics organization continues to improve the speed of our service while improving load factors and vehicle utilization. Our commitment to safety has reduced our OSHA recordable rate to world-class levels, lowering our costs and, more importantly, reducing the number of people hurt on the job. As a reminder, this segment now includes our North American laminate, wood, and vinyl operations as well as rugs and carpet.

Sales of our hard surface products are growing faster than carpet due to their increasing use in new home construction and residential remodeling. In all of these hard surface categories, we are increasing our participation in the home center channel and expanding our partnerships with national and regional builders.

The marketplace has embraced our new product introductions, including longer and wider engineered wood planks, laminates featuring deeper, more realistic textures with water resistant technology. This month, we are launching our new high-end double-stained wood collections that offer rich multicolor visuals. Our hard surface margins benefited from higher volume, plant productivity and cost-containment initiatives.

Our acquired and legacy US sheet vinyl and LVT business performed well during the period. With IVC, we are leveraging Mohawk's relationship to expand our vinyl sheet and LVT sales in all channels. We are investing in innovative products with market-leading designs and features, including new collections with more realistic visuals as well as phthalate-free vinyl collections with lower emissions. Our new LVT plant in Georgia is starting up and we are training personnel to support the operation. We continue to improve the productivity and yield as we refine the manufacturing processes.

For the period, the flooring rest of the world segment's adjusted operating margin was 18.5%, an increase of 250 basis points over last year driven by improved volume, productivity initiatives, and lower costs offset by the start-up expenses of our new Belgian LVT plant and the translation impact of the stronger dollar. Net sales for the segment were down approximately 7% as reported but were up approximately 13% on a constant exchange rate basis, including about three weeks of IVC sales in Europe.

Sales of almost all product categories improved over the prior year with our new laminate introductions enhancing our market position. Improvements in our laminate manufacturing facilities drove down costs and expanded our capacity, which had inhibited sales of our new collections earlier this year.

During the period, we had strong sales growth in Eastern Europe, Australia, and Russia, although we are now seeing a slowdown in our Russian laminate business as the economy weakens. Across Europe, we are investing in consumer advertising this fall to promote our brands and new collections. Our Czech wood plant is now operating near capacity with improved costs and margins although currency translation of wood products shipped from Malaysia impacted our costs. Our Belgian LVT sales continue to increase as we broaden our product offering, increase production, and improve manufacturing cost and quality. Additional equipment will be installed at the end of the year and during the first of next year to increase the plant's capacity.

Our insulation board and roof panel sales and margins are improving. We're implementing equipment upgrades in our board manufacturing facilities to optimize our Spano and Unilin assets. We have numerous projects underway to enhance the mix and cost of our board offerings to increase our margins.

The IVC acquisition adds a strong management team, leading manufacturing capabilities, and new market opportunities that we can optimize with our existing business. We have realigned the sales and manufacturing organizations and identified best practices to enhance our combined laminate, vinyl, and panel businesses.

I'll now turn the call over to Frank to review the financial performance for the period.

Thank you Jeff. Net sales for the quarter were $2.042 billion, slightly down at about 0.3%. They were up 4% on a pro forma basis using a constant exchange rate. All segments grew in local currency with FX reducing sales approximately $141 million in the quarter.

Our gross margin was 30.1%, as reported, or excluding charges, 31%. That's up 260 basis points from last year with increased volume, better productivity, and lower cost driving the improvement.

SG&A as reported was $359 million. Excluding charges, it was 17.2% of sales. That's up 20 basis points over last year as we are investing back into the business by expanding our sales force and increasing sampling and merchandising.

Restructuring and acquisition costs were $27 million with about $19 million in cost of goods sold and $8 million in SG&A. Of the total, $14 million related to the IVC and KAI acquisitions with the balance for plant closures in the flooring North American segment and continuing integration plant closures with the Spano and Unilin businesses. We estimate $35 million to $40 million of additional restructuring in the last half of 2015. Our operating margin, excluding charges, was 13.8%, up 240 basis points, with FX impacting results by approximately $25 million compared to last year.

Our interest expense was $17 million. It's down about $4 million due to the redemption of $254 million of our 2016 bonds last year and the introduction of our US commercial paper program, both yielding lower rates.

Other expense was $3 million, unfavorable to last year by $4 million due to transactional FX impacts.

The income tax rate for the quarter was 24.3% compared to 24.5% last year. We estimate the full-year tax rate to be 22% to 23% for 2015. And, in 2016, we're estimating 24% to 25% as our full-year tax rate.

Earnings per share, excluding charges, was $2.69. That's up 22% from last year. EPS would've been $2.95, or $0.26 higher, using a constant exchange rate.

If we turn to the segments, in the global ceramics segment, sales were $790 million, down 1% as reported, which includes $18 million from the KAI acquisition. They were up approximately 6% on a pro forma basis using a constant exchange rate. FX was a $69 million headwind to sales in the quarter.

All regions were up on a local currency basis compared to last year.

Our operating margin, excluding charges, was 15.6%, up 220 basis points from positive volume, mix, and productivity. FX was a headwind here by approximately $12 million.

In the flooring North American segment, sales were $920 million, up 3%, and this includes $10 million from the IVC acquisition. We had increased volumes in all of our product categories, except for broadloom carpet. The operating margin, excluding charges, was 11.7%, up 310 basis points with productivity, lower costs, and higher volume increasing margins.

In the second quarter, our North American segment included a $14 million benefit from input costs of raw materials, labor, energy, and SG&A, which had different impacts on the margins. We anticipate additional margin benefit in the second half of this year compared to last year from further FIFO inventory flow-through, which typically takes one to two quarters.

In the flooring rest of world segment, sales were $332 million, down 7% as reported. And this includes $28 million from the IVC acquisition. Sales were up 5% on a pro forma basis using a constant exchange rate. The declining euro reduced sales by about $72 million compared to last year. The operating margin, excluding charges, in this segment was 18.5%, up 250 basis points due to higher volume, lower cost, and productivity, again with the weak euro negatively impacting results by $13 million.

In the corporate and eliminations segment, the operating loss, excluding acquisition charges, was $10 million. We are expecting a full-year loss of $35 million in the eliminations segment.

If we move to the balance sheet, cash ended the quarter at about $170 million. That's up from last year with residual cash from the acquisitions in Europe. We will use these residual amounts in the third quarter to pay down our European revolver.

Receivables ended the quarter at $1.388 million with days sales outstanding at 54 days, slightly up from 52 last year. The days were primarily impacted by channel mix changes during the quarter. Inventories were $1.592 billion. Our days actually improved to 106 days compared to 109 last year as we are focused on inventory management.

Fixed assets were $3.015 billion and these included CapEx of $123 million for the second quarter with depreciation and amortization of $88 million. We estimate CapEx of $515 million for the full year of 2015 with depreciation and amortization estimated at $370 million. These both include the IVC and KAI acquisitions.

Long-term debt was $3.5 billion at the end of the quarter with our leverage at 2.6 times debt times EBITDA. We recently executed a $1 billion commercial paper program in Europe which will allow us to replace our current $600 million European revolver with lower rate debt in the third quarter. Based on current rates, this equates to approximately $5 million to $6 million in annual interest savings.

With that, I'll turn it back over to you, Jeff.

Thank you Frank. The US economy should continue to improve, strengthening both the residential and commercial flooring markets. During the third quarter, we anticipate that US sales and margins in all our product categories will improve over last year. In Mexico, we expect our sales and margin expansion to continue in a ceramic market that's growing strongly. Our European business should continue to improve with the economy as we benefit from our new ceramic manufacturing assets and other investments we've made. Even though Russia should be more difficult going forward, we expect to gain market share by expanding our position in all channels. In the third period, we will continue to absorb startup costs related to our many investments, including two new LVT plants, a new ceramic plant, a major upgrade in equipment across the enterprise. Our new acquisition of vinyl in the US and Europe and ceramic in Eastern Europe and Western Mexico will improve our results and long-term value.

Taking all these factors into account, our guidance for the third-quarter earnings is $2.91 to $2.99 per share, excluding any restructuring charges. Our third-quarter earnings guidance would've been approximately $0.24 per share higher on a constant exchange rate relative to last year.

Our business is benefiting from years of thoughtful investments in new equipment and acquisitions. In addition to being the world's largest flooring manufacturer, we have the most comprehensive product portfolio with the best brands and assets. Our management team is the strongest in history with well-developed strategies and the expertise to fully execute them.

Though foreign currency is creating headwinds, most of our markets are improving and we are growing on a local basis. We anticipate continued improvement in our performance through further new investments and carefully selected acquisitions.

We'll now be glad to take your questions.

(Operator Instructions). James Armstrong, Vertical Research.

Congrats on a good quarter. First question is, in US flooring, costs were down in the quarter, like you said, for many of the grades. Did you see the impact of lower wood costs and do you expect to have to pass those lower costs along, or do you anticipate keeping the delta in those costs for the foreseeable future?

Was that a wood question or a carpet question or both?

Wood question. It's a wood question and a little bit of both. So, if you could address wood and oil as well maybe.

Okay. Our US wood sales and margins are growing. We are seeing growth in the engineered woods with new products improving our sales and mix. The market prices in the wood and carpet seem to be relatively stable at this point although there are continued promotions as well as competition in the commodity categories as well as some mix decline in the various categories.

Okay that --

We had a slight benefit from input costs in that segment.

Okay, so just a slight one. That helps. And then switching gears a little, in the Russian market that you compete in, what do you believe your market share has grown to at this point, and do you think there is still room for significant market share gains in that region?

Listen, the market in Russia is fractured. And we are the largest and we're somewhere in the mid-teens or a little more. So there's huge opportunities over there to grow the business.

Okay, that helps. Thank you very much.

Stephen Kim, Barclays.

Congratulations on a strong quarter. My first question relates to the acquisitions that came in this quarter, KAI and IVC. I was curious if you could give us a bit more color about what drove sort of the upside to your previous guide. If you could give us a sense for maybe update us on what you are expecting for the remainder of the year from the combined two. And with respect to IVC specifically, do you think there's kind of operational improvements similar to what we've been seeing you doing in Marazzi at IVC, or is it a different kind of a story there?

Let's start out. So the acquisition results were slightly better than we -- were better than we expected. But I mean our expectations -- there's a lot of moving parts when we try to guess it. And at the time, we hadn't even closed the piece and knew what it was.

So to give you a better view of the future, I think the acquisition earnings for the third quarter embedded in our guidance is about $0.20 to $0.25 a share, to give you some basis to understand the future. With that, the organizations are really working well together. We are implementing best practices aligned across it. At the same time, we are absorbing startup costs of the new LVT plant and the laminate manufacturing plant in the IVC acquisition.

The IVC acquisition will not have the same synergies out of taking costs out. They were a highly efficient organization. So, it's increasing the market share, broadening the business, and selling more with it. We think the synergies -- there are synergies though in leveraging the business relationships, the design capability, the transportation and distribution, and then all the best practices across both businesses will learn from each other.

Great. Appreciate that color. And then I guess the second question relates to your commentary about the sales growth. I think you had mentioned that you expected to see sales growth improving in all of the -- all your segments. But did you mean, if you zoom in on the flooring North America portion, do you think that you are going to see sales growth in all -- both a resi, commercial, resi, remodel as well and did that comment about sales growth improvement in all three segments -- was that ex-acquisitions or inclusive of acquisitions?

I think that we'll see sales growth in all of the categories. We've put a lot of effort into the carpet business to put out products and things that are improving. I think we are well-positioned going into the fall with the pieces. So we think the rugs and hard surface categories are growing in the marketplace and we are growing our share within them. Offsetting that a little bit is the polyester products. The moment we sell polyester relative to other products and swap them out, we and the industry end up with a lower revenue line because they sell at lower prices. So that's impacting both us and the industry.

Great. Thanks very much guys. Good job.

Mike Wood, Macquarie Capital.

Excellent execution guys. Over the past three years, your SG&A has gone up by less than half of the sales increase. I imagine that's driven by a combination of that capital spending you've done and also integrating that (technical difficulty)

The CapEx projects that are across the piece, some of them are an expanding (technical difficulty) align the business with the revenues and mix changes that are going in them. Then, over the pieces, we -- the projects run anywhere from typically two-year paybacks to five-year paybacks across the business and they are all over. We think that we'll continue getting benefits from all these things over the next year. The large projects typically take X months to put them in plus get benefit. The new -- the ceramic business for instance, you start putting in a plan, it takes a year and a half or so to put it up. It takes another year to ramp it up and get the benefits out of it. On an existing business where we have the sales, you go into a new product category like you do at LVT, not only do you have the same startup pieces, you have to build the market and customer base to go along with it. So you start off with losses that last a while until you get the volume to go through it and then you start getting the benefits when you get it up to the appropriate level for each investment.

Great. And then I think, in the past, you've said that 5% to 7% is a more typical organic growth and a cyclical recovery for flooring. And you're doing 4% now but it sounds like you are, just based on all the initiatives you're doing, it sounds like there are some market share gains there. Just curious what you think is kind of holding that recovery back from getting to those more normal growth rates?

I think what's happening is the flooring industry is probably growing. My estimate is somewhat close to 4% this year is about the whole industry. However, we have larger participation in the carpet business and the laminate business, which are growing less. It also has those categories don't have as much participation in the new home construction as the other ones do, so there is a channel mix going on as well. And then, the laminate business had almost none in the commercial business. So there's a channel mix different as well as a product mix different going on.

Very helpful. Thanks.

Laura Champine, Cantor Fitzgerald.

Good morning. If we go back just for a hot second to the old segments, would the carpet business have shown a greater EBIT margin improvement, or would that be the Unilin North American business with stronger margin improvement in Q2?

Well, Laura, what we tried to do to kind of stay out of this scenario here is to give you guys in the 8-K we filed restated prior quarters in the current format so that you could understand the business a little bit better. And you know, we are not getting into that level of granularity in terms of different product categories within the new segments right now.

Got it. I guess the point of the question is to see, and I know this -- you get a bigger benefit in later quarters -- but is to see how much the benefit of lower costs in your carpet business in the US helped you into kind of gauge that versus the productivity improvements I think you are seeing in other parts of the business in North America. So any comment you could make on that would be great.

Yes, let me try to address that. So, in the North American segment, the largest driver of the margin improvement was productivity with input costs being the next largest. And we expect that business in all of our segments actually from a margin standpoint to improve as you compare year-over-year this year to last year.

And then I think the other thing is that the raw material benefit, the input benefit that I had mentioned earlier in my comments, in that segment was about $14 million. And we are expecting the input benefit from carpets to improve as we move through the year.

Just as a comment, the inputs include labor; they include materials; they include energy. There are offsetting ups and downs in all the different pieces.

Got it. Thank you.

Dennis McGill, Zelman & Associates.

I just wanted to go back to the comment you made on the accretion from the acquisitions. I think you said $0.20 to $0.25 in the third quarter. And I guess taking an assumption on annualizing that, it would seem like a 50%, 60% increase from your initial guidance. I just wanted to confirm then if that's directionally right. Maybe you could piece out a little bit what's so much stronger now, whether that's revenue or expenses now that you've been in the businesses?

It has increased significantly from where we started. At different points in time, we have the accounting that you have to do and where you apply it and what the costs are going to be and what the depreciation of things are going to be. So we now know what it's going to be versus a few months ago we were guessing at what it was going to be. And then at the same time, I think that we have -- the businesses have done a little better than we anticipated, than we had expected in the various pieces.

And I would just say be careful about just taking that number and times 4 to come up with a full-year accretion number because you've got seasonality and things such as that that would impact that differently.

Yes, I was getting to a smaller multiple, but I guess when you think about the accounting differences, there are adjustments that you talked about. Is the cash or kind of the core cash flow basis a lot stronger as well?

Your question is are the revenues and the margins better I guess with cash? And from what our original estimates were, I think probably a little bit.

Okay, very good. And then just one other. If you think about the incremental margins that you've talked about, Frank, in the past, even with all the investments that you've highlighted today and in prior quarters in the business and a lot of different sales efforts and so forth, the incremental margins I think continue to be very strong, even if you back out any raw material benefits. I'm just wondering if, as you look forward over the next couple of years, is the incremental margin opportunity stronger than maybe what you've talked about in the past as you brought a lot of these organizations together? Or is the investments that you are making going to be something that's consistent and so the incremental margins remain at these levels?

I would say our current thinking on incremental margins for the three segments today as we've restructured them is, in the North American segment, those margins would be kind of in the low-20% range. Ceramic stays as is at about 25% and rest of world is around 30%.

Okay, thank you.

Mike Dahl, Credit Suisse.

The first question I had is just on the recasting of segments. You've talked about how there are some benefits across kind of the combination of management and distribution and capacity. Can you size up the overall benefit that you are expecting from this realignment? And how much is purely management or headcount related as opposed to some combination of distribution and other assets?

The reason we changed the segments was because we felt that with the product categories we could coordinate the sales groups better. There were different -- before in the segment, one segment would be making the product and then we had the sales group in another segment and coordinating those two together to optimize them was not that easy to do. And so by putting them all together, we should be better coordinated and optimizing the assets better, in addition to which when you have lines that are responsibility driven, some things get fixed. And so by putting together the things in distribution, the things in engineering staffs, there are things in purchasing that can overlap each other in distribution. So, we think there's opportunities in all of those. It's just a small part of the whole piece to make the whole place work better.

Okay, thanks. And then second question, I think, in the opening comments, you noted that home centers are increasing the focus on ceramic. You are obviously growing share there. I think they've also increased the focus on things like vinyl. So I just wanted to get your thoughts on what's this coming at the expense of? Presumably it's soft surface still -- and how you are trying to kind of counterbalance that and thinking about kind of the residential carpet business.

Ceramic is one of the faster growing categories in the market. The vinyl is growing fast but it's starting from a relatively low base. You can't really compare the two is it. We think they will both continue as far as we can see at this moment.

As we've stated before and continues, consumers in residential are using carpet in less places as they like the looks of the hard surface categories. We participate in all of those. So we believe it's going to grow less than the flooring industry in total. And from our business, we are aligning ourselves to be able to compete in the various categories to have low cost, to reduce our SG&A structures in which we are investing more in right now to try to expand the business. I think we are as well positioned as anybody in the industry.

Okay, thank you.

Kathryn Thompson, Thompson Research.

First, on LVT, obviously it's been a fast growing product category, particularly in the US. And with that increased demand, you're seeing a greater capacity being brought up in the North American market. Could you pass some thoughts on how you manage pricing in an environment where you have greater capacity coming online and just to clarify for the listeners where you participate in the price scale for LVT products? Thank you.

The market is somewhere approaching $1 billion. It's expected to grow at about a 15% compounded rate in the US. It could be more or less. There is new capacity coming in. So what we expect to happen is that the local producers will supply most of the growth as well as reduce imported products into the marketplace. Within that, you're going to have different competitors with different strategies and different strengths going after different parts of the marketplace. And we see China losing share. So all that is going to be going on over the next, I don't know, two or three years as the capacity comes in and changes.

We think we are well-positioned. We have the most knowledge in the category. We have a plant that's significantly larger and more backward integrated in the US than others. And we have unique knowledge from our total businesses of creating style, design, and performance attributes that we think will give us advantages in the marketplace. So I like where we are with it.

In most new categories, as you go through, the productivity increases and style and design increases and the same thing is going to happen here.

As we've seen with some Chinese produced products for wood flooring, laminate flooring, could that bear a scar or could that be a black eye and be a benefit to the LVT product category too?

Listen. That is a concern of some people. At the same time, you have the -- we believe that we will be more focused on what the consumers want in this marketplace. They -- will bring the style and design that they expect. You take out the long lead times and working capital required to do it, the obsolescence costs and things. So we think we bring to the market competitive things.

And if you look at our products, in ceramic, almost, I don't know, 50% of the market is imported. We well understand how to compete against imported products.

Okay, great. Final question. We know that operating and cost efficiency is a constant process with any business. But that said, given the tremendous work that you've done in Europe to that end with your acquisitions, what inning are we in terms of the broad stroke production and efficiency changes and what could we expect as we look forward over the next 12 to 18 months?

The big ones we are still implementing are we are replacing -- we just replaced a chunk of the ceramic assets. They are just getting in the second phase that we have. Those will pay benefits mostly next year. We have another phase that we are looking at that we have -- are getting ready to put in in that one. We have -- we've closed plants in the board businesses. We are putting new assets in those as we speak. And then there's hundreds of projects below those as we go through. We have a saying in the business -- congratulations. You are halfway there. And that's where we are.

Perfect. Thanks so much.

John Baugh, Stifel.

Thank you and my congrats as well. Just a couple of things quickly. I know IVC is ramping capacity both in LVT and I believe in sheet vinyl. Could you help us? I think they did $735 million in revenue last year and I realize there's some FX headwinds on the European part. But the US part, which I think was 20%, could you give us a feel for how that's going to ramp in, say, 2015 and 2016 with the expansions coming on?

The startup is progressing. We are in the midst of training employees and speeding up the piece. So, the volume of the plant is going to be approaching $175 million to $200 million when it's running, you know, when we are utilizing all of it in the US. So that's ramping up and it will take, I don't know, through next year and probably into the next year to go through it. It depends on our fair strategies and how we modify the imports that we're doing or not.

In the European business, you have the Mohawk plant that's ramping up and they are helping ramp it up faster and reach higher capacities. And we're going to put more investments in it and it will take the same -- it will take at least a couple of years to get through it. The sales in that one, it's a smaller plant, will be probably about $125 million over time in that one as we go through. And then we're going to be looking for other alternatives to invest in the business and grow it even faster in all categories and geographies.

Great. I'm halfway there with my questions. Russia. Russia local currency EBIT, is it now trending south year-over-year even though you are gaining revenue there locally?

In local currency, the EBIT was slightly up over last year. Both sales and EBIT were solid.

But I don't want to mislead you. We are doing what we had to do to grow market share and we are so that EBIT in the quarter was up slightly but the margin percent is going down as we do what we've got to do to take market share. And we're going to continue going down that path. Now, at the same time, you heard we are considering adding new capacity. So, as we look out, we are looking out with a capacity about two years out so to keep driving market share and then have the capacity when this thing turns to support it. At the same time, we have a large share of the mid to high-end marketplace. So with the imports from Europe, which is most -- a lot of high-end, we see other opportunities in driving the high-end piece. But, you do have to understand that the market is in complete turmoil.

Understood,. Thanks. Good luck.

Keith Hughes, SunTrust.

In the prepared segments, you discussed Marazzi and some of the big manufacturing changes going on there and you made a reference to kind of the next phase for them. And so I'll ask you a question. What is the next step for Marazzi after all the work that you've already completed?

We changed almost all the assets in the Italian plants. There are some other assets in our Spanish plants that we can upgrade. And then what we've been doing up to now is trying to -- and doing a good job. The goal was to basically try to maintain the volume and get out of those bad products and bad margins and drive up the margins. We are only partway along achieving it, but we have made the changes in the product. We are bringing new innovation to the marketplace. We're changing the mix within it, and we are lowering our things substantially. So all those things are happening and will continue. And then now, for the first time since we owned it, we are looking at do we want to increase either our capacity or go into some different markets that have opportunities in products and volume where we've been constraining it a little bit?

Now, with -- we have the new Eastern European business with KAI and there's a lot of synergy between the assets there. And they tend to make low to mid-end the products and the other assets were focused on mid to high-end product. So we think that there's opportunities to export products from Bulgaria into other parts of Europe. And we have some new capacity coming in now, just came up with it. So we think there is a lot of opportunity to dramatically increase the margins and now we're just looking at things of how to move the top line in market that we are hoping is just getting ready to start improving.

All right, thank you Jeff. Second question. As your answer talked about a lot of stuff going on in this company right now, we are heading into the cash rich part of the year in the second half of the year, so leverage should fall. Are you still open in the market for the right acquisition? And is there a size limit which you would not go above, given all the moving parts in Mohawk at this point?

In our models, we believe the marketplace, that our business is going to continue getting better. Our margins are going to increase. Our profitability is going to continue to increase. We should be able to generate a lot of capacity to invest and our ratios of debt to cash flow will go down quickly. So our balance sheet will handle a lot of debt if we choose to use it.

More importantly is I'm not interested in being big. I'm interested in having the right businesses and getting the returns we want. So, we have to find the right things and the right businesses that we like. And we are always looking. And some of them take years to get together when we do it and some take months. But we just finished the other ones and we are starting to focus again on future opportunities.

Okay, thank you.

Robert Wetenhall, RBC Capital Markets.

This is actually Colin filling in for Bob. Thank you for taking my questions. Real quick on the margins for each of the new segmented categories. In the past, you laid out long-term goals. Do you have any long-term goals that you could share with us for each of these categories?

Yes, higher. (laughter).

Yes, I would say, in the North American segment, low to mid teens in ceramic and rest of world segments in the midteen range.

Great, thank you. And then on the potential for future acquisitions, are there anything in the pipeline you guys are looking at and are these going to be like more bolt-on or going to be kind of the same scale as the past acquisitions have been?

Listen, we are open to anything. We don't have a formula to do it. We look for the best businesses in the category and new things, be it new geographies or new products. When we go into areas where we have strong management, either geographically and/or within a category, we will look at businesses that are under great stress and we are quite confident that we can improve them. So, we are willing to do either or.

We've proven that we can move into different international markets and help those businesses and drive them and help them better. So getting into new geographies. We are open to anything as long as we can compete on an equal basis with non-US public companies in those geographies. So we are very careful about deciding where we going to it because on an equal basis we're quite comfortable and compete with anybody. But we don't want to be constrained with different rules than they do is a significant part of how we think about things.

Great. Thank you very much.

Stephen East, Evercore ISI.

Frank, I guess the first question for you around some raw materials. One, could you clarify? The $14 million in North American flooring, you said that had gives and takes, so they weren't all positive contributors to that $14 million bump.

Correct. I was saying that the different items that are included in there, which is raw materials, labor, energy, SG&A, some benefited and some went the other way.

Okay. And then, on ceramic, when was nat gas a meaningful benefit, or do you expect it to be? And I know you all haven't seen any incremental from the drop in oil prices. If you look at more recent cycles, how long would it take for you all to start -- if you were going to see some purchase opportunities, how long after oil drops would that come through? And then I just had one follow up on product mix.

It depends on each product and category can take anywhere from two months to six months, and then you have to -- for it to show up for us and then it can take anywhere from one quarter to two quarters or more to flow through our piece. It all depends on what it is and where it is.

Got you. Okay. In the nat gas, was there any benefit on that? And then Jeff, the other question I have is you are seeing mix shift up on the ceramic side in North America. You are not seeing it in the carpet side. Why do you think the consumer is willing to mix shift up on ceramic but not on the carpet side?

I mean there are higher selling products going on. Part of the difference is that the carpet business, the growth is coming in the new construction and multifamily businesses where the remodel is slower. And so what's happening is you are getting a mix change there and then, at the same time, you are getting the polyester prices. As we shift from nylon to polyester, we are reducing the selling prices of the industry's products for both.

And then on your question, Stephen, for nat gas, they have declined somewhat, but those declines are also -- have been offset by increased labor in healthcare and freight costs.

Okay. Thanks. I appreciate that.

Susan Maklari, UBS.

Just in terms of Russia, you mentioned in your comments that you are raising prices about 10% there but you are still really not fully offsetting the inflation that you are finding. How do you think about your ability to continue to raise prices, especially while you also want to gain share? And how long do you think that that can sort of hold for?

The reason -- I also said that my margins declined. So, as we are trying to gain share but even without gaining share, a market that's in turmoil, people lower prices. So, the margins are coming down. We are positioned as the leader in the industry in the mid- to high-end part of the business place, which is a good place to be. With that, our new introductions are doing well. Our higher margins on the other hand, to drive share, we are competing more in lower value products than we have historically, and so that's offsetting some of it. You should expect that my competitors are going to get under more stress and the prices are going to get under more pressure and our margins will have to absorb that.

Now, I believe that we are a very low cost producer in the marketplace and I think, when this thing, whatever it turns out on the other side, we are going to have a much bigger better business when we get to the other side because of all this, but the margins in between are going to be what they are going to be.

Okay. And then as we look out longer-term, how should we think about CapEx going forward, given all the acquisitions and the investments that you are making?

I'm going to invest in anything that gives me the returns I want, given the cash flow we have. We are looking to find internal projects which give the highest returns -- the lowest return at the lowest risk, so we're going to keep investing. We haven't set the level for next year yet. So the last two years, it's been about $450 million to $500 million as it's been, and we'll invest more if we can find the right places to put it.

Yes Susan, as Jeff had mentioned earlier, we think we are going to generate a lot of cash flow. And also, our debt capacity should go up in the next few years. So, we'll have a good bit of dry powder to invest in CapEx, greenfield projects, or M&A. (multiple speakers)

Okay, great. Thank you.

David MacGregor, Longbow Research.

Congrats on a great quarter. Thanks for taking my questions. Just Jeff, or Frank, I'm sorry, you gave that $14 million number for North American flooring and input benefits. Is there any way you could share with us numbers for rest of world in ceramics?

Yes. The input cost in ceramics was a positive $4 million. The input cost in rest of world was a positive $7 million.

Okay, thanks. And then I realize it's late in the call, but I wonder if you could just talk a little bit about competitive environments. You discussed the competitive situation in Russia in some detail. But just as you go through your other segments, obviously you are gaining share. You've got a lot of commercial momentum right now. Can you just talk about how competitors are reacting to this? Your thoughts there would be great, would be appreciated. Thanks.

I don't have too many markets that aren't competitive as everybody is trying to get their share of the different marketplaces. Let's see now, I'll walk you through it.

The North American market is typical. I think that a lot of the companies, including us, in the last five years we were in a downturn. Everybody is trying to get their margins back to where they were before historically. I think we are doing better than most and we are well-positioned. So having the competitors wanting to improve their margins is a good thing in the marketplace. At the same time, everybody's got capacity they are trying to use.

In the Mexican marketplace, we are growing our share significantly as we expand our distribution footprint. I think that we are bringing to the marketplace new style and design, which is giving us something to sell other than price. There are also some large players and we provide another really strong alternative in the marketplace in Mexico.

In European business, the ceramic business, we've been moving our business from where they were at a significant share in the lower end part of the marketplace. We are focused on driving our product mix up and significantly lowering our costs, both of which we are doing. In that marketplace, we are leading the marketplace in wood designs, which is growing rapidly, and we've been doing that. We are bringing in new style and designs and really small things at the same time. So, we are selling new looks and leading looks in the marketplace while at the same time lowering our costs. As competitors get into those different categories, we are bringing out new product categories. And then as you would suspect, as things get more competitive, we are maintaining our market share by moving the prices as required.

In the European marketplace, the laminate business is still competitive. There's a lot of excess capacity but less. Board businesses seem to have the -- there seems to be some volume moving up and there is opportunities for the margins to expand dramatically as people get more comfortable with the asset utilizations over the next few years. It could happen. Russia we already talked about.

What did I miss?

That was pretty thorough. Do you expect any sort of exit of capacity from any of these major markets for you? Are there players that are going to get shaken out because they are just too high up on the cost curve?

I think, in Russia, there are several under stress in it. And the answer though is typically assets, unless they are really bad, just change hands. So for assets to get out is rare. They just change who owns them.

Got it. Thanks very much for the detail.

Phillip Lewis, Security Capital Brokerage.

Good quarter. My questions have already been asked, so thanks.

There are no further questions at this time. I will now turn the call back over to Mr. Lorberbaum for closing comments.

Thank you very much. We had a really good quarter. We think the economy in the US and around the world is going to keep helping us. We think we are doing the right things to maximize our participation in the marketplaces, and we are looking for other ways to expand further.

Thank you for joining us. We appreciate it.

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