莫霍克工業集團 (MHK) 2015 Q4 法說會逐字稿

Good morning. My name is Heidi and I will be your conference operator today. At this time I would like to welcome everyone to the Mohawk Industries fourth-quarter 2015 earnings conference call. (Operator Instructions). As a reminder, ladies and gentlemen, this conference is being recorded today, Friday, February 26, 2016. Thank you.

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

Thank you. Good morning, everyone, and welcome to Mohawk Industries' quarterly investor conference call. Today we will update you on the Company's results for the fourth quarter of 2015 and provide guidance for the first quarter of 2016.

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

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

Thank you, Frank. First I will begin with a review of our results for the past year. We delivered record annual sales of $8.1 billion, growing 10% on a constant exchange basis, and record adjusted earnings per share of $10.20. Our adjusted operating income exceeded $1 billion, and improved 26% compared to 2014.

Last year, we achieved record earnings per share in each quarter with about 30% of our business outside the United States, where we faced significant foreign exchange headwinds. If adjusted for exchange rate changes, our 2015 net sales would've been $490 million higher, an impact of approximately 6%. And our operating income would have been $74 million higher, a 9% impact.

Our strong performance was the result of aggressive growth strategy and targeted investments we began in 2013 as the economic recovery gained momentum. Since that time we have invested almost $5 billion, of which about $3.5 billion was in nine acquisition to expand our products, geographies, and market share. And about $1.5 billion was in our existing businesses to introduce innovative products, enhance manufacturing efficiencies, and expand our capability. While making these investments for future growth, we improved our balance sheet and reduced our leverage, enabling us to optimize our returns.

We remain optimistic about 2016, and will invest an additional $600 million to $650 million in internal projects this year, which include increased ceramic capacity and upgrades in our US, Mexico, Europe, and Russia; process improvement in carpet manufacturing; additional LVT manufacturing in the US and Europe; increased wood production in the US and Europe; and installation of advanced technology in our laminate businesses.

During 2015 we changed our organizational structure to create three segments: global ceramic, flooring North America, and flooring rest of the world. This restructuring has enabled us to optimize our assets, leverage our customer relationships, and transfer best practices to maximize our profitability. By fostering greater interaction between our teams, we deliver innovative new products, increased collaboration among our sales groups, and improved productivity and cost across our global organization.

Last year, as a result of continuous improvement, we closed all or part of 13 plants and warehouses across the enterprise to streamline the business. Over the past year, we completed four acquisitions. The IVC Group is a major, fully integrated vinyl flooring manufacturer that provides Mohawk with leading positions in the US and Europe in both sheet vinyl and luxury tile. KAI extended our leading position in ceramic tile into Eastern Europe. The acquisition of a ceramic plant in northwest Mexico provided a new supply strategy, giving us advantages in the Western US and Mexico.

In the fourth quarter, we acquired three plants to expand our European insulation board business. In 2015, to support future growth, we expanded our capacities in ceramic tile, polyester carpet, LVT, and premium laminate. In our higher-growth products and geographies, we increased investments in new products, samples, and merchandising systems, as well as sales personnel to increase our market penetration. Our results reflect the great work of a deep and talented management team that concurrently executed complex initiatives across multiple product categories and geographies.

Despite some moderation in the US economy during the fourth quarter, we are entering 2016 with cautious optimism, based on a number of leading indicators, including a healthy consumer with rising household spending, low gasoline prices, and improving unemployment rate. With mortgage rates remaining at historic lows, 2015 existing home sales rose more than 6% year-over-year. The National Association of Home Builders reported that new single-family home construction rose last year to the highest level since 2007, with expectations for continued gains in 2016.

Rising home values accelerated housing turnover. And the aging of the country's residential infrastructure will continue to affect home improvement investments, which Harvard's LIRA index predicts will surpass the previous peak of 2006. The American Institute of Architects correctly predicted solid growth in commercial construction in 2015, and forecast continued commercial growth in 2016, with hotel and office space leading the category.

Low oil prices are expected to keep the Russian economy in recession through 2016. The Mexican economy is benefiting from low unemployment, strong consumer activity, and government reforms that are improving the construction in the country. The European Central Bank's quantitative easing program is providing stimulus for growth in the region, and most economists are predicting modest gains for the Eurozone in 2016.

Turning to our fourth-quarter performance, our record adjusted earnings per share rose 24% to $2.82, even as we increased investments to improve future results. This represents our seventh consecutive quarter with record adjusted earnings per share. Our net sales of $2.0 billion were a record in the period, and represent an increase of 13% on a constant exchange rate basis and same days basis. Our adjusted quarterly operating income margin rose to 14% of sales, an increase of 260 basis points, due to productivity, volume, and lower costs. Every segment delivered sales growth on a comparable basis while also expanding margins.

I will now review the fourth-quarter performance by segment. Our global ceramic segment net sales, adjusted for currency translation and days, rose 7%, with adjusted operating income up 14% on a constant exchange rate basis. We continue to reap the benefit of our Marazzi and KAI acquisitions. The combined R&D of our worldwide ceramic business has dramatically enhanced our style leadership, product technology, and process enhancements. In addition, we're using our Italian, Bulgarian, Russian, and Mexican ceramic capacity to support sales in the United States market.

Our North American business makes up the majority of our ceramic segment. In the US market, new home construction represented the most robust channel during the quarter, followed by commercial and residential remodeling. Our margins increased during the period as we improved our mix, enhanced our productivity, and leveraged our overhead. We increased our sales investments to improve our market position by increasing service centers, expanding our sales personnel, and upgrading our distribution. Our ceramic [Statements] program, a store-within-a-store concept, has grown to include 215 of our country's largest dealers, and is enhancing their sales and margins.

We continue to improve our position in the home center channel, with greater commitments for both floor and wall tile. Our American Olean and Marazzi brands are growing sales through partnerships with leading independent distributors and through our own co-branded service centers in markets without strong partners. We're are increasing our product mix as we introduce higher style products in larger sizes, planks, stone looks, hexagons, and breaks. We also are introducing large and small wall tiles with unique surface structures, which are now used as focal points in all areas of the home.

We have made significant progress in realigning our plants and production lines to specialize in different products, optimizing our productivity and service. Our new Tennessee porcelain plant is in the final stages of construction and should start up within the quarter. There will be three new kilns which begin production during 2016, and we expect to fully benefit from these by 2017. The new plant will enhance our premium offering and replace products that we have historically imported, improving our service and cost.

We have integrated the ceramic plant we acquired in western Mexico and have improved its capacity and cost structures. Shipping from the facility should provide us advantages within the western part of the US and Mexico. The Mexican economy is doing well, and the ceramic industry there grew by more than 15% in 2015. Due to the investments we made in Salamanca in 2012, we've been able to outpace market growth. We have dramatically expanded our product offering at all price points, and have improved our margin and mix as we increased our market share. To continue this progress, we are planning to increase the capacity of our Salamanca plant to greater participate in the central Mexico region that makes up 60% of the total market.

Our European ceramic sales have been growing in a lackluster market. Our product mix has improved as we introduced uniquely styled products and expanded our margins. We have successfully enhanced our product offering. And we are now expanding our salesforce, introducing new merchandising, and escalating our retail sales training.

We anticipate completing the second phase of our equipment upgrades by the second quarter, which will further enhance our product offering and improve our cost structure. The third phase of equipment upgrades will begin the end of this year, and complete our major investments to modernize the Marazzi assets we acquired in 2013.

The optimization of our Bulgarian ceramic operation continues with a focus on improving our product offering. We have a strong management team in Bulgaria that is enhancing our internal processes and manufacturing methods. We are improving our mix by increasing the use of digital designs in larger sizes, implementing more automation, and supplying product to the US, Eastern Europe, and other international markets.

In Russia, we gained market share in the period as sales increased and margins compressed. Our comparisons in the fourth quarter and first quarter will be difficult due to consumers accelerating purchases a year ago. We have outperformed the market due to our strong brand position, new styles in larger and smaller sizes, and increased distribution in both the remodeling and new construction channels. We are expanding our porcelain capacity, which was fully utilized last year.

Our North America segment's net sales were up 6% on an adjusted days basis, with adjusted operating earnings expanding 31%. All of our product categories contributed to our growing profitability, and we are well positioned in each product category to take advantage of an improving US market.

The carpet industry's growth remains slower than the hard surface categories. Our profitability continues to increase, even though carpet sales were softer, and pricing was impacted by price and mix pressure.

We have taken many actions to optimize our business profitability, which is expanding with the business cycle. Our builders and multi-family residential business continue to outperform the remodeling channel. Sales of our premium carpet products, including our luxury Karastan brand and SmartStrand product collections, grew during the period. We continue to introduce differentiated products with our SmartStrand Silk Naturals collection, which replicates the appearance of wool with superior softness, texture, and performance.

We further extended our SmartStrand family with our all-new All Pet Protection, which has enhancements for cleaning up accidents. This collection was voted by retailers as the most innovative flooring product in the industry at the recent show in Las Vegas. We also enhanced our Continuum recycled polyester by introducing Forever Fresh carpets with odor-eliminating technology, which gives consumers another reason to trade up to Mohawk. We are continuing the expansion of our sales teams, as well as increasing their specialization to maximize our participation in each end market.

Our commercial margins continue to improve as a result of our new product introductions, streamlined manufacturing, and plant consolidations. Our carpet tile sales are increasing as the market continues to expand. And sales of our Duracolor branded products are increasing due to their premium performance characteristics.

We have expanded the shapes and sizes of our carpet tiles, and we have introduced new collections with cushion that improve comfort and reduces noise. To extend our participation in value-oriented commercial carpet, we launched new collections made with our exclusive recycled Continuum polyester.

Our carpet operations continue the simplifications of our raw material components and manufacturing. Last year we closed 10 plants and warehouses and several production lines. All of these actions are contributing to the improvement of our cost, as well as the enhancement of our efficiency, quality, and service levels.

Our rug business continues to outperform the overall segment. Our new product innovation is creating more fashionable accent rugs made with our exclusive fibers, providing softer characteristics with greater value. We are entering new rug categories, including commercial and residential utility mats, and flat woven outdoor rugs.

Our North American laminate and wood business continues to improve as we enhance the differentiation of our products. We are expanding our new, impressive laminate collection which provides stylized looks unachievable in natural wood. We are increasing our laminate production with new technology to support these unique features. In addition to our best-in-class innovation, we also extended our design leadership by introducing newer longer and wider planks in both laminate and wood collections. Our engineered wood sales continue to grow, and we're planning new investments to support increased demand.

We are launching unique Pergo branded collections in wood, laminate, and LVT into the specialty retail channel to leverage one of the most recognized consumer brands in the flooring industry. The new Pergo products were debuted at the recent industry show and were enthusiastically received by the retail community.

The reorganization of our US vinyl business has been completed, with the former IVC management team directing the product offering and marketing strategies for all of our vinyl products and brands. Our IVC vinyl sales are performing as planned. And we are introducing sheet vinyl and LVT products into our Mohawk brands from our US facilities.

Our new LVT plant continues to improve in performance with increased production. We anticipate that the present production line will be operating as planned levels by the end of the year. LVT continues to take share in the US flooring market as sales of the category expand across all channels and end uses. Our sales trends anticipate full utilization of our current LVT capacity, and we have announced investments to further increase our production and expand our product offering.

We are also expanding our sheet vinyl business across other brands, and leveraging our customer relationships to increase our market penetration. We are continuing to ramp up our Mohawk branded sheet vinyl sales in builder, multi-family, and retail markets, and we're developing new products to extend our sheet vinyl further into the commercial channels.

Our flooring North America segment has made progress in expanding our brands and customer relationships, expanding our style and design, transferring innovative manufacturing practices, and utilizing the Mohawk distribution for all products.

During the period, both the sales and margins in our flooring rest-of-world segment rose dramatically in a muted economic environment, due to improved results and the IVC acquisition. On a local basis, adjusted for days, net sales for the segment increased 41%. Adjusted operating income was 59% up on a constant exchange rate basis. The leadership for the flooring rest-of-world segment has been reorganized to leverage sales, manufacturing, and product management for the entire organization.

Our new vinyl business is being holistically managed to optimize our asset distribution of best practices across the segment. Our laminate and wood business in Europe outperformed the market as a result of our focus on differentiated products at mid- to high-end price points. Where we operate direct distribution, it has enhanced our market share and increased our penetration.

We continue to expand our latest embossing technology, which creates more realistic visuals. We will further extend this technology in new, larger planks to be launched later this year. To meet the growing demand, we are installing additional capacity this year.

Our European wood sales are growing quickly, and we are taking market share. The Czech wood plant we acquired two years ago is operating near capacity, with the balance of our product needs coming from our Malaysian facility. We are planning to expand our engineered wood capacity in the Czech Republic.

The legacy IVC vinyl business is reaching full capacity. In sheet vinyl and LVT, we are achieving some capacity increases through process improvements. The new LVT plant in Belgium is operating well, and the sales are developing better than plan. This plant is temporarily constrained by manufacturing limitations which will be addressed with additional equipment, increasing the capacity by 40% in the middle of this year.

To meet current demand, we are importing LVT to supplement our present capacity, and were planning further investments to add a new LVT production line. We are continuing to develop new products in anticipation of these increased capabilities.

Our insulation business had record sales this year. We continue to enhance our distribution and manufacturing capability, including the addition of another production shift at our plant in France. At the end of the quarter, we finalized the acquisition of three insulation board plans in Ireland, the UK, and Belgium to expand our offering and geographic footprint.

Our management structure has already been reorganized, and we are identifying opportunities to enhance all the operations. Our other board product sales were up slightly, with margins improving for mix, asset upgrades, and plant consolidations.

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

Thank you, Jeff. Net sales for the quarter were $1.998 billion, up 2% as reported. During the fourth quarter of 2015, we had four fewer days than we had in the fourth quarter of last year. On a constant FX and days basis, our sales grew 13%, or 4% excluding acquisitions. Foreign exchange reduced sales $86 million compared to last year. All segments grew on a legacy basis using a constant exchange rate and days. Acquisitions and volume increases were the primary drivers.

Our gross margin was 31.1%, as reported. Excluding charges, the margin was 31.9%, up 360 basis points from last year. Higher volume, productivity, and lower raw materials were the biggest contributors to this increase. Our SG&A as reported was $373 million or 18.7% of sales. Excluding charges, SG&A was 18% of net sales, up from 17% last year. Fewer days in the quarter and investments back into SG&A moved the percent up from last year. Our focus on investments allowed for better sales growth as well as improved mix in the quarter. We anticipate the SG&A percentage improving to a lower number in 2016 as we leverage spending against sales growth.

Unusual charges for the quarter were $28 million, with approximately $20 million associated with our acquisitions. The balance was due to restructuring actions in the North American flooring segment. For the full year, we had $212 million in nonrecurring expense, with $122 million of that related to a legal settlement -- which, by the way, we believe was extortion -- $70 million for acquisitions, and $17 million for restructuring of existing businesses.

Of the acquisition costs, $8 million were for M&A fees, $14 million were for inventory step-ups related to purchase accounting, and $48 million for plant closures, manufacturing consolidations, administrative reductions, and system upgrades, all to improve profitability.

Our operating margin for the quarter was 13.9%, up 260 basis points. And our operating income would have been $12 million higher using a constant exchange rate. Interest expense was $18 million and showed improvement this year due to a premium paid last year on the early redemption of some of our bonds.

Other expense was $12 million and includes a charge for unwinding an $11 million indemnification receivable recorded in the IVC purchase accounting earlier in the year. There is also an offsetting $11 million benefit included in tax expense, as reported, as a related liability was unwound.

The income tax rate, excluding unusual items, for the quarter was 18.7%; compares to a 19% rate last year. We expect the first-quarter rate in this year to be 25%, and the full-year rate for 2016 to be between 24.5% and 25.5%. And I will remind you that our rate fluctuates by quarter, depending upon timing for certain tax deductions. Our earnings per share, excluding charges, was $2.82, which represents an increase of 24% over last year.

Turning to the segments. In the global ceramic segment, sales were $712 million, down 4% as reported. Using a constant exchange rate and days for our legacy business, it was up 4%. FX was a $45 million headwind in the quarter for this segment. All regions are up on a constant currency and days basis. Operating income margin, excluding charges, was 13%. This expanded 150 basis points over last year. And operating income would have been $5 million higher using constant exchange rates. Productivity and improving mix were the biggest drivers of this increase.

In the flooring North American segment, sales were $880 million. They were flat, as reported, but increased by 3% on a constant days basis for the legacy business. Hard surface products grew at a faster rate than soft surface. Our operating income margin, excluding charges, was 14.2%. That is up 340 basis points from last year, with productivity and input costs the biggest contributors to the improvement, partially offset by price and mix. Our team continues to produce better results through continuous improvements and innovative products.

In the flooring rest-of-world segment, sales were $407 million, up 22%, as reported, or up 7% using constant exchange rate and days for our legacy business. This was unusually high due to laminate, wood, LVT, and intellectual property sales, which we do not believe will continue in the next year. FX was a $42 million impact on revenues during the quarter. Our wood and vinyl flooring products both had strong quarters, and we believe they outperformed the industry.

Our operating income margin, excluding charges, was 16.4%, up 240 basis points from last year. And operating income would have been $7 million higher, using a constant exchange rate. Volume, productivity, and input costs were the biggest drivers of growth here.

In 2015, we had operating income from our patents which was $130 million, and was higher than last year due to payments for past-due fees. We expect 2016 to be 5% to 10% lower. After June 2017, when the Uniclic patents expire, we estimate annualized operating income of $30 million to $35 million from other patents. In addition, over the next few years we will benefit from internal investments, both current and future acquisitions, and lower interest costs.

So if we turn to the balance sheet, receivables ended the year at $1.3 billion, with days sales outstanding at 55 days compared to 54 days last year. These days in the current year were slightly impacted by change in channel mix. Inventories ended the year at $1.6 billion. Our inventory days continued to show strong improvement, at 112 days for the quarter compared to last year's 116 days.

Fixed assets were $3.1 billion and includes fourth-quarter capital expenditures of $152 million, and depreciation and amortization of $94 million. Capital expenditures for the full year were $504 million, with D&A of $363 million. We estimate $600 million to $650 million of CapEx for 2016, with depreciation and amortization estimated at $400 million for 2016.

Long-term debt was $3.2 billion at the end of the year. Our leverage ended the year at 2.1 times debt to EBITDA on a pro forma basis.

And with that, I will turn it back over to Jeff for concluding remarks.

2015 was the best year in Mohawk's history, and we expect the momentum to continue this year. We anticipate that the demand trends in our US and international markets will remain consistent with what we have been experiencing. Though growth in Europe is limited and negative in Russia, our international businesses are delivering solid results on a local basis. Our sales and margins should continue to improve over last year as a result of our continued innovations, process improvement, and disciplined execution.

Our recent acquisitions are progressing with operational and market synergy as we anticipated. This year we will increase investments in our existing businesses to optimize our long-term performance.

Taking these factors into account, our guidance for the first quarter is $2.24 to $2.33 per share. That would be a 32% to 37% increase over 2015, excluding any restructuring charges. We have taken many actions to outperform the industry in each of our products and geographies over the past few years, and will continue to benefit from those strategies this year.

In 2016, we will continue to execute creative product ideas, along with substantial investments to optimize our long-term results.

We will now be glad to answer any questions.

(Operator Instructions). Mike Wood, Macquarie Securities.

It's actually Ryan Hunter on for Mike this morning. My first question regarding the CapEx, $600 million to $650 million -- this is a much higher level than we've seen, and above recent elevated levels. Do these investments carry the similar 3- to 5-year payback as you mentioned in the past? Or do capacity-expanding investments carry a lower payback?

No, most of them would be in the 3- to 5-year range, as we go through. Let's just see if I can give you some more color. Between 2015 we've been expanding or upgrading our ceramic in the US, Mexico, Europe, and Russia. In carpet, we increased our polyester and rug capacity, as well as other process improvements. In LVT, we are adding US and European capacity. We are increasing our engineered wood in the US and Europe. We are upgrading our laminate technology and replacing leased assets with owned assets.

These assets will support approximately $1.2 billion to $1.4 billion of sales based on today's exchange rates. If these investments were a stand-alone business, they would rank as one of the top flooring companies in the world.

And then just a quick follow-up regarding the organic growth -- a little bit of deceleration, this 4.2% versus 5.6% in 3Q. Can you give us some color on what region decelerated organically? And do you think that this can reaccelerate back into the 5% range in 2016?

Yes, I think that was just timing. I think if you look at our outlook for our business, both in the US, Europe, and in Russia, it's going to be more of the same; with, here in the US, the new residential continuing to grow nicely, and commercial and remodel also growing. And Europe is showing some improvement as well. And then Russia, we've got a recession we're dealing with, but they are outperforming the market there.

Brandon Rolle, Longbow Research.

This is Brandon Rolle on for David MacGregor. I just wanted to touch on -- you're increasing engineered wood. We had heard from some people that there's been a shift in the market to people wanting larger, wider planks. Is this fueling your increased investment in engineered wood in the US? Thanks.

Yes, the higher-end part of the market is trending to wider and longer planks. Our present manufacturing capacity is close to being fully utilized. So the new capacity will be able to make all the things we have been, plus make wider and longer planks in addition.

Okay. And as a follow-up on that, I was also hoping you could walk us through your three segments, and what's driving the organic growth in each. Thank you.

Listen, I spent 15 minutes trying to answer that in my opening remarks. (laughter) Let's see. In the carpet business, we believe that our focus on new, innovative products is expanding our position within the marketplace. We are dramatically cutting the cost structures we have to improve margin in what's going to be a lower-growth business.

In the rug business, we are going into new product categories that we weren't in, as well as we have introduced new products. In the ceramic business in North America, we are the leader in offering a total broad product line in all categories. We are putting new investments in that allow us to make products that the majority of the people in the United States can't, and give us leading positions in style and design.

In Mexico, we are expanding from a relatively small base. We had success in filling up a brand-new plant from 2012. And at this moment, we are planning to double the size of that plant again this year to take advantage of our expanding distribution in the marketplace.

In Europe, the ceramic business has been limited growth. But through our investments, we've been able to significantly cut the costs. And at the same time we've been able to bring new product and innovation to the marketplace, which is allowing us to grow in a low-growth market. But our primary objective was we bought the business that was not profitable and expand the margins, but there is some increase in capacity as we go through.

The new acquisition with KAI, they have a high position in their market share in their markets. We are continuing to support them to optimize that business through improving their mix and giving them opportunities to sell product outside their local region with all our other sales and marketing people across the country.

The Russian business, we are growing market share significantly as the market declines. Last year, our volume was flat or up a little bit in a marketplace that was declining significantly. We've been able to do that through -- we have the leading style and design in the marketplace, where the best options for high-style product that used to be imported out of Italy, which we can make in there. Our high-end ceramic capacity was fully utilized last year. And we are actually increasing our capacity in Russia in a market that's horrible, is it. At the same time, we are using the strength of our business to increase the distribution into the various channels and optimize our brand.

Moving back into the flooring, rest of the world, our laminate -- we focus on medium to high in Europe. We have brought unique product innovation to the marketplace, which we started introducing last year. We have extended it this year. We have run out of capacity in that category which is being installed the first of this year so that we can keep growing that, which is very unique. We have multiple brands in the marketplace which we go after different channels of the marketplace.

The acquisition of IVC brought us another brand that's focused on a lower price category than the other ones we have. So we are using it to expand our distribution across the marketplace, but still not in the commodity areas.

The wood business, we still have a limited portion of a very large market, and because of that we have focused on, again, the medium to high end. We had been able to add value to the marketplace. We bought the ceramic business in Czech two years ago, I think. And it's running full, and we're planning on expanding it to give us the opportunities to grow further.

The IVC business, we're managing through the changes and doing well. As their sales to Russia declined, we put those in the other marketplace. We think we are going to be pushing the limits of the capacity in sheet vinyl.

In LVT, the two plants that we have are selling everything they can make. The newer plant, which is the one that we started building before then, they have helped us optimize. And by the middle of the year, we will increase the capacity by about another 40%. We have planned to put on another line in our facilities over there to grow further in the marketplace in LVT.

And then we have our insulation board business. We had two plants that we greenfielded both. The first one has been running at full capacity. The second one is in France. We are adding another shift to it, as we speak. And then we purchased another business that had different geographic presence, as well as slightly different products in it.

And then our board businesses, we've spent money consolidating those and increasing the capacity, limited, but it's more a cost savings and closing plants. And we should get most of those benefits during this year.

All right. Thank you for that color.

Scott Rednor, Zelman & Associates.

Jeff, I have a bigger-picture question for you. Two years ago, you had no capacity in LVT. With the additions, you are now going to have plants in, call it, a 3- to 4-year period. What gives you confidence that you need all that hard capacity versus the sourcing model that's helping you right now?

One of the major reasons we were interested in IVC was the technology and leadership they had in the marketplace. So, we had gone into it with one plant and we were working to start it up. And in a limited period of time with them, we've been able to ramp it up to where it is. And the plant is utilizing all we can make and it's expanding further. And we believe that we can sell all of that in Europe.

In addition, in the United States, the plant that they had constructed, we have significant commitments from people to use the capacity. The market in the US and Europe, collectively, is growing about 15%. In the US, that's about $200 million a year of new capacity coming into the marketplace. And we think we are best positioned to provide the products to the marketplace. And we are well prepared to compete with the imported products coming in with higher style and value that's required to compete.

At the same time, we believe we can bring better local service to the marketplace. We can bring better product innovation to the marketplace. And we don't have to fight the FX volatility. We believe the market can absorb it, and we are going to be the leader in it.

Appreciate that color. Just one quick one, Frank. The IP catch-up, can you help frame how much that aided 4Q in terms of what won't repeat in 1Q?

When you say the IP catch-up, you mean the (multiple speakers)?

You highlighted on the -- yes, no. You highlighted the sales impact on flooring rest-of-world in the quarter.

Yes. What I was referring to when I talked about the full year, then in the full year we would have fewer sales -- less operating income in 2016 for the full year because of uncollected fees that we got -- past-due fees that we got in 2015. That wasn't referring to the quarter.

Appreciate it. Thanks, guys.

Susan Maklari, UBS.

You guys talked a little bit about the price and mix pressure that you are continuing to see in carpet. Can you just talk a little bit to -- has that shifted any as you look towards the beginning of this year, and how you are thinking about that trending through 2016?

Yes, the industry -- two parts here. As polyester grows in the industry, polyester is a lower-cost option than the other pieces. So as the industry shifts, the industry average price goes down. And then second, as expected, as the raw material prices have declined in the commodity products, the average selling prices have gone down with those. And the combined pieces are reducing the average selling prices for the industry and for us.

At the same time, we are really focused on bringing differentiated, value-added products, which we mentioned several in the prior discussions that we are coming to the market with. We did the same thing last year. And we continue, in every business we have, trying to bring differentiation that the consumer is willing to pay for, and differentiates us. So we believe that our average price is better than the industry's.

Okay. And then just looking more broadly, have you seen, in terms of the overall demand trends, has there been any improvement in terms of perhaps mix shift? People willing to spend on some higher-end kind of products at all?

When you look out across all our different businesses, we are selling higher-end products in all of them. My laminate business, my ceramic business, and my carpet business -- we are selling higher-end products. And in most of our businesses, our pricing is consistent or growing as an average price point. The carpet part of it, though, due to the other shifts -- you have some general shifts going on in it that's pulling the average prices down, which we are also susceptible to.

Okay, but across the rest of your products, are you seeing an improvement in the higher-end categories, would you say?

We are, but I think it's driven by our style and design and innovation.

I'm not sure the industry (multiple speakers).

Okay. All right. That's helpful. Thank you.

Eric Bosshard, Cleveland Research Company.

You commented about market growth being similar in 2016 to 2015, or perhaps your growth. But I'm curious on your market share expectations in 2016 relative to 2015 -- how you would expect to perform, relative to the market, especially in response to the investments that you are making across the business?

All those investments we went through were to increase our ability to participate in the different markets. And we expect to use the assets we put in.

Does that mean that the share performance, or the performance relative to the market, is similar in 2016 than 2015? Or would you be disappointed if you didn't grow faster in 2016 versus 2015, relative to the market?

I think that we should grow faster than the marketplace, but there's all kinds of shifts going on. Like we mentioned in LVT, some of LVT is going to come out of imports. Some of my ceramic business is going to come out of imports. Some of my laminate is going to come out of imports. So there's the piece between imports and exports that is going on also.

Let me ask the question differently, then. As you think about the 3- to 5-year payback, how would you suggest we look for that on the income statement, top line relative to operating margin? Where would you expect for that benefit to show up?

It's going to be two parts. One is that you've seen last year, the year before, and this year, we keep telling you that our margins are going to increase. So part of it is going to show up in greater efficiencies in the business. The other part is going to come, that all these investments I mentioned earlier would have a capacity, once they are installed, of somewhere around $1.2 billion to $1.4 billion. And over the period, I expect to use it. Some of it will take three years or more.

And Eric, in the quarter, we had for the total Company productivity improvements for all three segments of about $35 million. And a portion of that is from capital that we are investing, and a portion of it is for process improvements. But to Jeff's point, we are driving productivity throughout the business with what we're investing back.

Okay. And then a follow-up. You talked last quarter about incremental SG&A investment in an effort to drive market share. Curious at how that's playing out. I know some of it is 4Q, some of it is 1Q, and throughout 2016. But in terms of the traction and getting payback from that incremental investment, how would you evaluate how that's going so far? And what is your outlook for payback on that?

The bigger part of the investments are in salesmen, samples, and displays, but salesman is a big part of it. And it takes a while to ramp those up, so we're expecting those to help us through next year. But we didn't expect to see dramatic improvements in the short term. You have to build the relationships in pieces as you go through, and we think it's one of the reasons to help us achieve our goals in 2016.

Okay. Thank you.

If I could add one more thing to that. We do think that as we move into 2016, our SG&A as a percent to sales will be down, compared to 2015 percent to sales.

For the full year.

For the full year.

Great. Thanks for that clarification.

Bob Wetenhall, RBC Capital Markets.

Fantastic finish to a great year for you guys. Tremendous execution. Just wanted to ask you --

We're just getting started.

Well, I was just going to ask you -- was kind of surprised, and also thanks for the great detail -- but you guys had huge progress on the margin front. If you [for thing] on a like-for-like basis, adjusting for currency and days, it's an incredibly strong year in what I would view as a muted environment.

How much more is left? Are you guys halfway done with your objectives? When you think about margin performance and all the investments you're making, you did a great job at detailing how you are spending money both through the SG&A line, a lot of plant capacity expansion. What does this look like in terms of margin performance coming up in the next couple years? How should we be thinking about that, given what you are putting back into the business? Maybe that's for Frank.

Listen, there's two parts to it. One is improvement in the cost structures. The other is top-line growth to support when we go through. If you look out over the term, we believe we will be able to continue growing the margins from year to year. However, just like everything else, we have to compete in the marketplace with whatever is changing. We think our cost structures will allow us to do that. In 2016, we're expecting both improvement in the margin percent and the top line, and we hope to continue it.

And I would just add, Bob, to that, that as we go through the year, each quarter we're expecting to see margin improvement.

Over the prior quarter.

Correct. Or the prior year.

The prior quarter in the last year.

Got it. So you are going to see sequential improvement as you move through the year. You had (multiple speakers).

Let me just clarify that, Bob. So in each quarter when we compare it to the prior-year comparable quarter, we will see improvement.

Got it. That's clear. Can you just give us a view on -- you had $163 million of acquired revenues. We were hoping you could give us a split for -- in which segment those revenues fit.

Well, I thought we did that when we gave you the legacy growth.

You did. Give it to him again.

Between the three, sorry.

Yes, yes, yes. So, our legacy growth in the -- so, this is constant exchange rate and constant days. Our legacy growth in the global ceramic was up 4%. Our legacy growth in flooring North America was up 3%. And our legacy growth in rest-of-world was up 7%. And on the rest-of-world segment, this was unusually high due to higher laminate, wood, LVT, and IP sales, which we don't think are going to continue.

The rate won't continue at that rate, going into this year.

Got it. So that's the timing shift. And then if you are thinking about global ceramic on a constant currency basis, you also had $50 million of higher sales. And I was trying to think about how to split that between acquired revenues, volume, and price in the ceramic business.

I may need to follow up with you after the call on that one, Bob.

Got it, gentlemen. Great quarter, and good luck in 2016.

Thank you.

Kathryn Thompson, Thompson Research Group.

First is just stepping back and looking at more from a cyclical standpoint. Based on your experience -- and you've been through quite a few cycles -- what were the earliest signs of the market fundamentally slowing, versus merely seeing a pause? And how does this compare to what you're seeing in your business right now?

In prior cycles, the thing that led the downturn always was a reduction in the remodeling business, because it's done as needed. And as consumer confidence went down, as they got less comfortable with the future, they would postpone remodeling pieces. And we haven't seen that.

Okay. Perfect. And then could you quantify what the raw material tailwind was for fiscal 2015? It may be easier just to do it for the North American segment -- what your expectations are for fiscal 2016.

At a high level for the year, we think that the raw material costs will be fairly stable versus last year, is our expectation. But there's a lot of questions in that.

In the short term, you want to give more of a short-term --?

Well, so again, what we're doing, Kathryn, is comparing how input cost impacted us in this quarter compared to fourth quarter a year ago. And that's about a $30 million tailwind, which was the same benefit that we saw in the third quarter.

Offset by --.

Yes, and offset by price mix. So we had about a negative $10 million price mix in the fourth quarter. Again, comparing where we are at the end of the fourth quarter this year, compared to the end of the fourth quarter next year.

And the numbers he gave you left out other inflation that also went against it of different types.

Perfect. Thank you very much.

Mike Dahl, Credit Suisse.

I wanted to stick with the flooring North America segment, and some of the margin color for the first question. I think when part of the segment realignment was trying to get better efficiencies out of the relationship between the carpet side of the business and the hard surface. And it seems like, just based on the improvement we've seen in margins, that that's been successful so far.

But just wondering if you can give us any sense of how much of that is contributing to the margin performance, and magnitude-wise. And have you fully realized the benefits of that, at this point? Or do you still think the hard surface has some catch-up left in terms of margin performance?

There's a lot of moving parts in the business. The major synergies between the business: you have the back end, which is the distribution, being able to get it to the marketplace through the distribution piece. You have the sales personnel that are helping each other push products into the marketplace. You have innovation ideas that are criss-crossing the business better. And then you also have the ability to use the brands differently across different pieces, as you go through.

So, we just introduced the Pergo brand into LVT, laminate, and wood, which is a new way of getting it to marketplace. So there's all kinds of different ways of helping the business, as well as you have just the engineers and the production people passing best practices between the businesses -- all help.

Got it. So it sounds like you think there's still some runway left, though, on that side, Jeff.

Listen, there's always room. We have a saying here: no matter where you are, you're halfway there.

Right. Okay. And then on just a -- helpful color around the CapEx, and just laying out how much the contribution from the investments will generate, as far as sales over the next couple of years. But just a clarification, was that inclusive of the expected 2016 spend? And then as we (multiple speakers).

Well, what we did was take the capacity, as of 2015 -- 2014? Where did we start from? I think we started that capacity in 2015 -- the capacity that we were at at the run rate of 2015, and compared it to where it would be when everything was up and running from the 2015 and 2016 investments. Some of which happens within a year, and some of it won't get optimized for three.

Perfect. Okay, thank you.

James Armstrong, Vertical Research Partners.

The first one is on the CapEx. You are spending a lot -- and acquisitions -- you are spending a lot on organic CapEx this year. Is this a result of a thinner acquisition pipeline? Or do you believe that there are still a lot of good potential acquisitions to be had?

One has nothing to do with the other. Our goal is to have a balanced approach between the two. Our balance sheet, we believe, could handle another $1 billion or $1.5 billion worth of debt. So under the right pieces, we are ready to go in acquisitions in addition. But those aren't easy to come by when you want them.

Totally understand. And then switching gears a little bit, oil and energy as a whole has a lot of varying impacts in costs and on the pricing environment as a whole. Could you talk a little bit about what impacts you are seeing, and maybe if you can help us quantify those impacts?

It depends on what moments in time you start and stop. On a going-forward basis, our present belief is that the raw materials will be relatively stable with 2015. But that's making a lot of assumptions in what's going on. But we think that's going to be -- that's our best guess, at this point.

Okay. And on the pricing side of the equation, are the lower oil prices impacting any particular products? Or are those different dynamics that are impacting prices?

The lower oil prices have been impacting the average selling prices of the carpet piece, as well as the opening price commodities. By definition, commodities are more price-sensitive, and so much of that has already occurred.

Okay, so it's pretty much behind us, at this point, is what you would say.

That's a -- we'll have to see. I can't control my competition.

Fair enough. Thank you for taking my questions, and congrats on a good quarter.

Stephen Kim, Barclays.

I wanted to talk a little bit about your patent income out of Unilin. I think one of the things that's lost on some people is that Unilin didn't just have a good invention, but they developed the intellectual capital to be able to monetize their patent. And so they have a platform with which they can monetize other patents.

And so my question is, what's the prospects for you to be able to grow from your base of $30 million to $35 million, excluding Uniclic? Is it mostly dependent upon new patents that you would have to file? Or do you think you will be able to grow, let's say, advisory fees, from helping third parties monetize their patents, kind of like you did recently with your Novalis relationship?

Let me clarify it a little bit. The $30 million to $35 million for other installation things is usually the patents we sell as a package. So as one starts and one stops, we have to go out and do things to maintain that $30 million to $35 million. It's not a gimme, off the start, as we change it. We think that we have the right things in place to execute that.

You are correct; we have unique knowledge in how to manage and create value for patents. But having something that unique that's salable -- it's not that easy, or everybody would have it. So, we think that the $30 million to $35 million is what we know of today. If we come up with more, we know what to do with them when we get them.

I'm sure you do. Okay, that's helpful. Thanks for that. The second question is a little bit of a broader one. I'm thinking about your North American distribution and sales network in the context of two realities that I've been thinking about. First, there's been a quantum leap in recent years with respect to visual productions, the ability to achieve visuals. And it has allowed customers to achieve remarkably similar looks across a variety of flooring materials.

And the second thing is that Mohawk seems to be uniquely positioned to capitalize on this convergence or flexibility in design across many, many different products, given that you are a major manufacturer of all of these products, and nobody else really is.

So, a two-part question with that. One, do you think, longer-term, that the improved visuals is going to introduce negative mix shift as people achieve those visuals with cheaper materials? Or, instead, do you think it's going to lead to a desire on the part of consumers to spend more money, more of their design dollars, on the floor, given the innovation?

And the second question is what are some of the unique ways you can use across product sales and marketing strategy to get better profits and sales, in ways that your competitors simply can't, because they don't make all those flooring materials?

The first answer to question, which was an either/or, is a yes. And the yes means that in some of my product -- in all my product categories, having better design and better features, you can get a premium for, which you hear us talking about all the time.

On the other hand, by having better looks and different product categories, my personal view -- which I can't say everybody agrees with me -- is like wood that sells at higher prices, I think -- given there's more alternatives for wood, there's a possibility that people use those in place of wood, and those things they are using our lower price. And I have no idea how the mix is going to change between the categories, and neither does anybody else, is it.

On the use of our various assets, it is a huge benefit because all the similar looks are selling at all the different product categories. And we are unique in having capabilities between laminate, wood, vinyl, and ceramic that the same technologies and same style and design fit all of them. And then, with the acquisition we have of Marazzi, the Italians with style and design are way ahead of the rest of the world. We use that to apply to every other one.

And then, I have to tell you, we get ideas from -- our Russian business is different than it. They come up with different ideas. And we have meetings where we put the different groups together, and they all go about it in different ways. And it gives us a unique perspective, not only by product, but by worldwide geographies, that ideas transfer back and forth. And I think it puts us in a unique position that nobody else can compete with.

Got it. That's exactly what I was looking for. Thanks a lot, guys, and good luck.

Keith Hughes, SunTrust.

Just to go back to the patent issue real quick, the $30 million to $35 million in 2017 -- is that exclusive of the Unilin patents that are going to be expiring? Or does that include some of the ones you'll see in the early part of that year associated with that?

That is the ongoing rate, after the existing Uniclic patents conclude.

Okay, so --.

So we tried to give you a forward annual rate, not an amount for a given point.

Okay. And as Frank had said, the patents expire, or the ones in question expire, in the middle of that year. So the number for the full year should be some level higher than that. Is that correct?

The first half will be different than the second half, and we tried to give you a way of getting to it.

All right, good deal. Jeff, at the beginning of the call here, you had talked about process improvement in carpet. What exactly are you referring to there?

It's not just in carpet. In all of our businesses we are pushing how to use technology different, how to change the processes, how to simplify the businesses, how to increase quality, service. And there are hundreds of opportunities that every department is working on. We have -- each of those are lined up. They are assigned to different people in each one. There are monthly, quarterly calls to see how we're going against them. Some of them require investment, and some of them require just innovative ideas.

And we're doing it everywhere. The productivity in 2015 was, what? Do you have the number for the whole year?

Full-year productivity --.

For the whole Company.

For the whole Company was -- in total, including CapEx -- about $135 million.

There was $135 million of improvements, some driven by capital and some driven by bright ideas.

And would that include in carpet within that framework? More cost take-out potentially, whether it's backing, face fiber, or things like that, from what you are doing now?

Let me say it differently. It includes ideas for how to create different engineering and raw material usage to make things better at advantageous costs across all the different things. And we're always looking for those.

All right. Final question, for Frank: I believe you had a bond issue that came due in January. Was that just rolled over in the revolver?

It was rolled over into our commercial paper program, Keith.

Commercial paper. So what is the commercial paper running at right now, in terms of interest rate?

Well, in Europe we just issued some at a 0 rate, but it's probably running in the mid-single-digits in Europe. And then over here, I think it's running around --.

0.7, I think.

No, it's -- I think it's around 20 to 30 basis points over here, Keith.

And the bond issue was 0.6 and 0.8, I think, or something like that, right?

Yes, yes, it was 6 and 8. Yes, we expect to have about $25 million to $30 million in interest savings this year compared to 2015, as a result of what we just talked about.

I thought the US rates for commercial paper were higher than Europe. (multiple speakers)

We will come back to you on that.

It's virtually nothing, so it doesn't really matter (laughter). Thanks.

Josh Chan, Baird.

You guys have done a great job on productivity. And I was just wondering, with this continued investment in CapEx, should we think of the level of productivity contribution as sustainable, or even accelerate?

I don't have that number to give you at this minute. There's productivity -- I mean, they are built into our program. They are not built into yours. The reason we are going to have higher earnings next year, and the year after, is a combination of all these things. And they are all built into our increasing margins that we talk about. So we haven't given you a number for those, since we only give one quarter forward.

Okay, I appreciate that. And then my second question is on the order cadence. Given some of the more headline volatility in terms of macro, in terms of the stock market early in 2016, have you seen a change in your order cadence? Or has demand been pretty steady in the first two months of this new year?

Our first two months in the industry are really hard to read, all the time. We have markets going on that change time. We have a seasonality that consumers, when they go through Christmas, quit spending. And you have the winter weather, the harsher weather and others. So when we are in the first January-February, it is really difficult to read relative to an ongoing trend. We have to get more through March to see how the thing levels out, because people buy inventory sooner or later. The weather can change the piece. So I can't say we have a good, clear view at this minute.

All right. Thanks, guys. Great quarter.

I'm showing that there are no further questions at this time.

I turn the call back over to the presenters.

We appreciate you joining us on the call. We are enthusiastic about our position in the marketplace. And we believe that the market will continue improving from everything that we see. Thank you very much for joining us.

And this concludes today's conference call. You may now disconnect.