莫霍克工業集團 (MHK) 2016 Q1 法說會逐字稿

Good morning, my name is Heidi and I will be a conference operator today. At this time I would like to welcome everyone to the Mohawk Industries first-quarter 2016 earnings conference call.

(Operator Instructions)

As a reminder, ladies and gentlemen, this conference is being recorded today, Friday, May 6, 2016. Thank you.

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

Thank you, Heidi. Good morning everyone and welcome to Mohawk Industries quarterly investor conference call. Today we'll update you on the Company's results for the first-quarter 2016 and provide guidance for the second 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 quarter Mohawk delivered an outstanding performance. Our earnings per share were $2.38 excluding unusual charges, an increase of 40% over the prior year and the highest first-quarter earnings per share in the Company's history.

This is the eighth consecutive quarter in which the Company has delivered record adjusted EPS. For the period our adjusted operating margin rose to a first-quarter record of 11.6%, an increase of 200 basis points over the prior year as a result of acquisitions, volume, productivity and input cost. Revenues grew across all segments with first-quarter net sales increasing 15.5% as reported to $2.2 billion, the highest sales figure we have ever reported for any quarter.

All of these results were achieved with one less day in the period than last year. We entered 2016 with an optimistic outlook and our first-quarter results exceeded our projections with strong results from all three of our segments in both revenues and margins. Our recent acquisitions continue to improve our performance with the synergies enhancing our existing and acquired businesses and the lower impact of the US dollar benefited our results.

After completing four acquisitions during 2015, we have the capacity to absorb additional opportunities if they become available. Our major capital projects initiated last year are progressing as expected. With the first production line in our Tennessee ceramic plant now operational our US LVT production accelerated.

The second phase of our European ceramic upgrade now complete. Each of our capital expansion projects create significant long-term value adding new revenues by increasing our product offerings and our customer base. Typically these projects take one to three years to achieve their full benefit.

All of these investments could provide higher returns than our acquisitions though startup costs impact our immediate results. In 2016 we have identified more opportunities to grow our business and have already approved additional LVT production lines in the US and Europe, the doubling of our Mexican ceramic plant in Central Mexico, the final phase of our European ceramic upgrades and the expansion of our US and European premium laminate production with new technology.

We anticipate investing more than $600 million in capital projects this year and we are assessing further internal opportunity. Similar to 2015, the US economy had a soft start this year but continues to benefit from solid job creation and low interest rates. Despite sluggish new-home starts in March, the National Association of Homebuilders affirmed the recovery of the US single home family market.

With home prices rising and existing home sales strong, the Harvard LIRA index is forecasting residential remodeling to accelerate throughout the remainder of the year. An April home improvement survey indicated that half of US homeowners are planning remodeling investments this year. And new flooring was the second-most common project being anticipated.

The consensus among commercial construction forecast is for continued growth during 2016 with hospitality and office space sectors leading the category. In Mexico, government spending has benefited the country's construction sector which continues to drive high ceramic growth. In Europe the central bank's latest round of interest rate reductions and its asset purchase program are supporting the region's economy.

The Russian economy remains in a recession with continued pressures from low oil prices. In 2016 we're investing in all of these markets to position Mohawk for future growth.

Turning to a review of our first-quarter performance by segment, our Global Ceramic segment sales were up approximately 8% as reported. On a constant days and currency basis, the segment grew 11% with the legacy business up almost 9%. Adjusted for operating income for the segment, it rose 18% on a constant currency basis over last year to an operating margin of 13%.

Our North American ceramic business which constitutes the majority of the segment reflects a strong US market where US ceramic continues to gain share. Our business through our service centers grew the fastest of all our channels during the period as we invested more in sales personnel, marketing a new product introductions. Within that channel, the combined American Olean and Marazzi service centers had the highest rate of growth as our consolidated approach expands our customer base.

We're continuing to upgrade our showroom slab warehouses and aggressively promoting business through user-friendly websites and social media. Throughout our network of almost 300 service centers we're rolling out paperless sales and operation processes to improve customer service and enhance efficiencies. We continue to expand our independent distributor base which will improve our penetration in the market.

Our new floor and wall tile products are gaining additional placements in the home center channel as those retailers place greater emphasis on the category. Our new product innovations in wood and stone looks as well as smaller shapes are growing our business and winning industry awards. To support our growth our new plant in Tennessee initiated production on schedule and the first line is running well.

The plant's remaining two lines will be operational between now and August. To satisfy increased demand in the US we are utilizing our worldwide ceramic assets in Mexico, Italy, Bulgaria and Russia to support our domestic production. Our Mexican ceramic business is outpacing the market and is the fastest-growing part of the segment.

Our mix and margins continue to improve as we expand our distribution. The plant we acquired in Western Mexico last year is operating well and continuing to improve its productivity and cost position. We're finalizing the expansion plans to double the ceramic plant near Mexico City with construction beginning in the second quarter.

We're continuing to increase our customer base in the market, adding new distributors, expanding homes replacements and increasing our participation in new construction projects. All of our plants in Mexico are improving their productivity and quality as we introduce larger sizes as well as specialized shapes.

Our European ceramic business continues to improve in line with our plan with sales growing in the first period. We are increasing our investments in sales personnel, merchandising, retail training and brand advertising to enhance our distribution.

The second phase of our equipment upgrades have been installed and is operational, improving our cost and service levels. Additional investments have been improved to modernize the balance of the original assets that we acquired in 2013. We continue to introduce innovative products that will expand our margins including stone looks, thin and three-dimensional wall tiles and cement designs.

Our KAI acquisition continues to progress as we enhance the product offering, organization and reporting systems while expanding sales to Western Europe and the US. Our Russian ceramic business continues to outperform the market which remains challenging as the economy contracts and investments in real estate decline. Our sales during the first quarter increased on a local basis while our margins narrowed due to inflation and lower mix.

We're introducing many new products and strategically opening owned and franchised stores. We're implementing equipment upgrades to optimize our manufacturing of new sizes and this fall a new production line will expand our premium offerings. We continue to approach the market aggressively which will enhance our position when the Russian economy rebounds.

During the quarter our Flooring North America segment sales were up 7% as reported. On a constant days basis the segment grew approximately 9% with legacy sales up 4%. Adjusted operating income for the segment rose 42% over last year to an operating margin of approximately 9%.

Our first-quarter adjusted profit margin for the segment improved as a result of process efficiencies, investments in new technology, differentiated new products and cost improvement. Last year we began expanding our investments in sales personnel and marketing to broaden our distribution in carpet and hard surface products. To optimize their performance our sales organizations are specialized by both product and channel and we are supporting them with greater sampling, merchandising and retail training.

Our hard surface products continue to deliver substantial growth as we expand our market share as consumer flooring preferences shift. Growth in value priced polyester carpet and lower commodity pricing are reducing our average selling prices as lower raw material costs are reflected in the market. Despite these pricing pressures, the investments we made last year to differentiate our products and reduce our manufacturing costs are improving our margins.

As a reflection of our investment in product innovation, Mohawk's new SmartStrand collections won all three major dealer awards at the national trade shows. We continue to build on our strengths in premium residential carpet with innovative products such as Continuum polyester with odor eliminating technology and Silk Naturals which replicates wool with a superior softness, texture and durability. These introductions are being well received by retailers and should enhance our mix as homeowners seek luxurious softness and improved performance.

Our commercial margins improved with the success of our fashionable new product introductions and streamlined manufacturing processes. During the period our retail hospitality and healthcare channels were the strongest, in line with industry trends. Our commercial carpet tile continues to grow as we expand our specifications with large end-users as well as increasing our transactional business.

We are completing the consolidation of our woven manufacturing into one location which will improve our efficiencies and deliver better service and quality. During the quarter our hard surface sales increased across all channels as we leverage our carpet relationships. Our high style laminate collections are outpacing the market as consumers gravitate to realistic visuals and the enhanced texture and unique water resistant technology.

Our engineered wood sales grew substantially in both

construction and remodeling. Our longer and wider wood planks are being well received by consumers as a higher value alternative with contemporary styling. We have announced a wood price increase of 6% to 10% effective on May 15.

We are increasing sales of our sheet vinyl under our Mohawk brand. Our LVT sales are growing dramatically in both residential and commercial sectors as we ramp up production at our new US plant. The plant is making significant progress and its operation should be optimized by the end of the year.

LVT remains the fastest-growing flooring product globally and we are extending our US leadership in the category with a further expansion of our Georgia facility. The additional capacity will be operational at the end of 2017.

Our manufacturing plants and all products are improving process efficiencies and quality as we are implementing equipment upgrades to extend our competitive advantages. To support our business growth, this year we're expanding our capacity in premium laminate, carpet cushion and polyester carpet and rugs. We're adding another shift to our engineered wood plant and investing in new capacity for longer planks.

For the quarter, our Flooring Rest of the World segment sales were up 56% as reported. On a constant days and currency basis the segment increased 62% with legacy sales up 4%. Adjusted operating income for the segment rose 70% on a constant currency basis to an operating margin of approximately 17%.

The European flooring market is slightly improving with the LVT and wood categories experiencing the greatest growth. Our laminate and wood business in the region outpaced the market trends due to our emphasis on higher end product categories that are differentiated.

Our laminate sales are outperforming as our deeply textured water resistant collection continues it strong momentum in the market. To meet growing demands for longer products we're installing additional laminate capacity over the next 12 to 18 months. We've completed the integration of the IVC business which is reducing our costs and improving efficiencies.

To offset currency changes in a number of European countries we're implementing laminate price increases. In Russia we are focusing on the premium laminate market and our plant is operating near capacity. Our engineered wood sales rose significantly during the period benefited by expanded sales under our Quick-Step brand and our direct distribution.

Our Czech wood plant is operating near capacity with additional product for the European market being supplied from our Malaysian facility. We anticipate further investments in our wood plants this year to reduce costs and streamline operations. Our material costs during the period were higher as we increased manufacturing to meet demand and we will implement price increases to compensate for the effect of raw material inflation.

Our sheet vinyl plants are fully utilized in the period and our margins improved as we increased our residential mix and commercial sales. During April we experienced a fire at one of our Belgian sheet vinyl plants that will reduce sales in the second quarter by about EUR3.5 million and income by about EUR500,000 after the insurance recovery.

Our LVT sales are growing substantially as our new Belgian production expands and we source products to grow even faster. Additional equipment will be installed in the facility in July to substantially increase our production of LVT. Due to the continued strength of LVT around the globe, we anticipate sales will exceed capacity of the two European LVT plants.

To meet the higher demand we have announced plans to further expand our LVT manufacturing in Belgium by the end of 2017 also. Our insulation panel business grew significantly during the period, primarily through the acquisition of Xtratherm which was completed at the end of last year. We now operate five regional insulation panel facilities in Belgium, France, the UK and Ireland, extending our geographic reach.

As we integrate the Xtratherm acquisition, we have realigned our installation organization and are improving efficiencies through the implementation of best practices. Our boards and roof panel business are delivering improved sales and margins as we upgrade the mix and equipment.

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

Thank you, Jeff. Net sales for the quarter were $2.172 billion, up 16% from last year or 6% on a legacy basis using constant days and exchange rates.

FX was a $26 million headwind in the quarter. We had one less day in the first quarter and we will have one less day in the third quarter this year compared to last year. We will have one more day in the second quarter and the fourth quarter this year compared to last year.

All segments and regions grew with ceramics showing the strongest performance. Our gross margin as reported was 29.5% or 29.7% excluding nonrecurring charges. That's up 200 basis points compared to 2015 results.

Volume, productivity and input costs drove higher margins. SG&A was $393 million or 18.1% of net sales excluding charges which is flat with 2015 percent to net sales. Sales and marketing investments made in the quarter were offset by leverage from higher sales this year.

Our investments are benefiting both sales volume and mix for our business. Unusual charges were $7 million in the quarter and were related primarily to acquisition integration and cost reduction through restructuring activities. We estimate $25 million to $30 million for the full year for these charges.

Our operating margin excluding charges was 11.6%. The margin grew in all three segments and our total margin grew by 200 basis points in the quarter with volume, productivity and input cost driving improvement. FX impacted our earnings negatively by $3 million.

Interest expense at $12 million for the quarter improved due to lower rates after the $254 million 2016 bonds were rolled into our commercial paper program. We estimate our full-year interest to be in the range of $45 million to $47 million. Other expense was $4 million and increased over last year due to FX transactional adjustments.

Our income tax rate was at 25.4% which is 50 basis points higher than last year. We estimate our full-year tax rate to be in the range of 24.5% to 25.5% and -- for the full year and slightly over 25% for the second quarter. Our earnings per share excluding charges were $2.38, an increase of 40%.

If we move to the segments, the Global Ceramic segment sales as reported were $774 million which is up 8% over last year and our legacy sales were up 9% on a constant days and FX basis. On a local basis, all regions saw strong year-over-year growth. Our growth was driven primarily by volume and the KAI acquisition.

FX in this segment was a $17 million headwind. Operating income margin excluding charges was 13%, up 110 basis points, driven by volume and productivity which offset SG&A increases and startup cost. Investments made in SG&A and startup costs will expand future sales and margins for us.

In the Flooring North America segment sales were $906 million, an increase of 7% as reported. Our legacy sales on a constant days basis grew 4%. Our rise in sales was primarily from hard surface volume growth and the IVC acquisition.

Operating income margin excluding charges was 8.7%. That's an increase of 210 basis points from lower input cost, productivity improvements and our acquisition.

In the Flooring Rest of World segment sales were $492 million, an increase of 56% as reported with legacy sales using constant days and FX up 4%. Foreign exchange was a $9 million headwind this quarter. The increase resulted primarily from our IVC acquisition.

Our operating income margin excluding charges in this segment was 16.7%, an increase of 90 basis points from the acquisition, higher volume, productivity and lower input cost. In the early second quarter, we had a fire in our sheet vinyl plant. The plant is currently running and fully repaired and we expect our insurance to cover all property and business interruption loss with the exception of the EUR500,000 deductible. Finally, in our Corporate and Elimination segment we had an operating loss of $9 million and we expect a full-year loss of approximately $35 million.

Turning to the balance sheet, our receivables were $1.407 billion with our days sales outstanding flat at around 52 days both this year and last year. Our inventories were $1.652 billion with our inventory days continuing to show strong improvement at 109 days this year compared to 113 days last year. Fixed assets ended the quarter at $3.224 billion and this includes in the first quarter capital expenditures of $141 million and depreciation and amortization of $100 million.

CapEx for the full year is estimated to be between $600 million and $650 million and our depreciation and amortization is estimated at $400 million for the full year. Our long-term debt ended the quarter at $3.3 billion and our leverage at 2.1 times debt to pro forma EBITDA.

I will now turn the call back over to Jeff.

Thank you, Frank. Mohawk delivered another strong quarter during the first period with all of our segments enhancing their position in the marketplace.

In the US increased investments in marketing, products and distribution should increase our sales and margins across all product categories. Though growth in Europe is limited and Russia remains in recession, we're anticipating improving our market share and positioning ourselves the future. We are investing in our businesses at the highest rate in history to expand our product offerings, improve efficiency and increase capacity.

Our recent acquisitions have been significantly integrated and our financial leverage has been reduced. So we can pursue additional opportunities as they become available.

Taking all these factors into account our guidance for the second quarter is $3.29 to $3.38 which would represent a 22% to 26% increase over 2015 excluding any restructuring charges. Our first-quarter performance reflects the positive impact of the investments we have made in the business over the past three years.

The incremental capacity increases planned for this year and next will support additional sales of $1.2 billion to $1.4 billion across our businesses. Our unique products, marketing and manufacturing position will enhance our operating results going forward.

We will now be glad to take any questions.

(Operator Instructions) Susan Maklari, UBS.

Thank you. Good morning.

I'm wondering to start off with if you can talk a little bit more about some of the raw material costs? It seems like some things are working perhaps more in your favor while others are becoming more of a headwind. Can you just give us some overview on what you're seeing there?

The biggest changes in raw material are in our North American segment. Presently the raw materials we're assuming for the year are going to remain about stable given where we see the markets and the flow-through of the costs. Our mix in the segment is improving but at the same time our average selling prices are coming down.

At the same time the commodity prices have declined as the industry has passed through some of the raw material costs. Even with that our margins are expected to increase from operational improvements and new product initiatives.

And I will just add because I know it will come up later for the quarter in the North American segment, if we look at the first quarter compared to this year to the first quarter last year our input costs were a positive $25 million which includes our raw material benefit and then our price mix was a negative $7 million for the quarter.

Okay, thank you. And then as we sort of think about the investment that you're making this year, the $600 million or even higher than that, is that in any way reflective of sort of the pipeline of potential acquisitions that you're seeing? Has anything changed perhaps in terms of the size or the level of opportunities that you're seeing that is kind of causing a shift to more internal investment versus other opportunities?

No, what we're trying to make sure we got across is that we have absorbed the acquisitions to levels where we're doing normal incremental improvements that the CapEx where we've identified more than normal projects that are in the basis and we're executing those, that the leverage has improved, that low interest rates are enabling financing of additional projects at low rates and we believe the management and the balance sheet can take on more of both and we're aggressively looking for them. And we didn't want you to get surprised if we found more of them as we go through the year.

Okay, thank you. That's helpful.

Keith Hughes, SunTrust.

Thank you. The organic growth for the full Company over the last year or so is just substantially higher than we've seen in some time and your mix has changed as well. As you look out near term, is there anything that would cause that to change from this kind of mid-single-digit number we've seen either positive or negative?

We don't see anything that's going to dramatically change the trend. The investments we're putting in are trying to drive more of it. There's a timing issue between when we put them and when they actually occur and then whatever happens in the markets happens and we'll adjust to it as we see it.

And I guess the follow-up question, on the investments you had referred to is there any particular projects that, you don't even have to name what they are, that are abnormally high in terms of the returns that we would see kind of a spike move in margins once they are fully ramped in or would it be more consistent?

Well, listen I'm going to try to give you a really high level which I gave in the thing I did before but I will try to summarize it for you. The $600 million is invested across almost the entire business. The major projects include a ceramic increase in the US, Mexico, Europe and Russia, we're increasing capacity in all the markets.

We have plans to expand our LVT, wood and premium laminate capacity in the US and Europe and we are expanding our polyester for both our carpet and rugs. Those are the big high-level pieces

And Keith, I would just add that I wouldn't expect to see as you described it a spike in our margins. I think our margins as we've said related to all the activity that's going on in the business we're going to continue to see them improve in each of the three segments this year compared to last year but at a slower rate of change than what we saw in 2015.

Okay, thank you.

Stephen Kim, Barclays.

Yes, thanks very much guys. Kind of as a follow-up to that second question, or Keith's second question, you all have been doing a tremendous amount of productivity initiatives over the course of the last couple of years and you made an interesting comment in the release about how typically you would expect to see these projects reach their fullness in one to three years.

Given the number of productivity initiatives you have I was curious if you could comment as to when you think in aggregate the projects that you've already undertaken are likely to see their biggest step up? Would that be in -- was that in 2015, would it be in 2016 or 2017 as far as you can see today?

There is no way for me to answer the question. There are so many numerous projects with all kinds of different time frames in them. So I will give you examples on extreme.

The new equipment that we're putting into our ceramic business in Europe is replacing old equipment. It's going in, we have trained people to do it, the market is there for it. So we shut down stuff, we put it in and almost immediately it starts running close to what we expect.

On the other extreme we're putting in an LVT plant that's coming up now. It's new equipment that's never been run, it's new technology that's untested. There are ideas that were put in it that haven't been utilized before.

And then you find out something and it takes you six months or more to get a new piece of equipment to replace whatever idea you had to improve it. And so it could take a year and a half to get it optimized or more. And you have all of the above.

And I would just add onto that, Steve, in this first quarter we had about for the total business about $29 million of productivity. And that includes like Jeff was saying large major CapEx projects but a lot of smaller CapEx projects and a lot of smaller process improvement types of projects.

One other thing, in optimizing the pieces depends on what it is and how much capacity, it could take multiple years to utilize the capacity. So not only do you have the learning curve going through it, it depends on the marketplace and what it is and what kind of step change we've made in the capacity of the business and what's going on in the market.

So synthesizing what you're saying and trying to put it into I guess the language of investors it sounds to me like you've got a number of things which are still playing out. It would certainly seem that based on what you've said the step up, the majority, the lion's share of the step up in productivity is likely not behind you but certainly in front of you based on the projects that you currently have got running. I mean that's a safe assessment, right?

That's correct. And then what we said is we expect the margin this year to be incrementally better but not as higher rate as they were last year.

And then at the same time don't forget as you're investing there's also incremental inflation going on, labor rates are going up, insurance is going up, all these other things you're having to offset take away from it in addition. There's a lot of startup costs every year in the business that you're overcoming.

Yes, absolutely, I appreciate that. Second question relates to profit margins in the IVC and Unilin businesses. I don't expect you to get terribly detailed in it.

But based on what we can see it seems based on our triangulation that IVC appears to be running at better margins in your Rest of World segment than we might have thought. And I was curious if you could comment, are you seeing generally similar margins at IVC to the rest of your base business in Rest of World? And if not, what do you think the timing is to sort of reach the mid-teens level that I think you talked about for IVC in Europe?

So we don't get that granular in the information. The margins with IVC were good when we bought them. The opportunities were to leverage their knowledge in pieces across the rest of the business and to put more investment in the business to grow their different categories.

Immediately they have helped us increase the productivity of our LVT plant in Europe. And you will hear us that we have already announced to build another one, take a year and a half to get up and going, so most of the opportunity comes from expanding the business. They were operating fairly efficiently before we got there.

Okay, great. Thanks very much, guys. Keep up the good work.

John Baugh, Stifel.

Thanks for taking my questions. Let's see, I guess laminate expansion, I heard it was at the premium end.

Given the growth of LVT and I assume the pressure it's putting on laminate, it's impressive to me that you feel you need more capacity. Could you maybe tell us what's going on? And I assume that capacity is in Europe and not also in the US.

Our business in laminate as we've always said is focused on the mid- to high range of the business. Our laminate business is driven by bringing innovation to the marketplace that differentiates it. And we have led the industry in the next generations of innovation for the last 20 years.

At this point we're introducing new products that are higher style that takes different equipment to make them. We have a different position in the visual looks as well as the length of planks we're changing as well as water resistance technology.

And for people interested in higher value and the best product in the marketplace, there's nothing to compare with ours. And we are expanding the sales of those businesses. Even though laminate is under pressure the higher end and with our differentiation we're gaining share in the marketplaces as those categories expanded people want to have better looking products.

So as a follow-up to that, Jeff, and I'd also love it if you could comment on units of carpet within residential and commercial, but as a follow-up to that question, are your lower-priced laminate capacity, is that not getting fully utilized or how is that situation? Thank you.

I'm not sure exactly your question because we really don't participate in the bottom commodity part of the business. Our assets are made to take on complexity and create differentiated looks, not to make commodity products.

So you're running your laminate pretty full out?

We are.

Okay. Any comment on residential and commercial units in the quarter? Thank you. Carpet.

The industry units I think in the quarter were about flat as that for it.

Scott Rednor, Zelman & Associates.

Hi, good morning, Jeff and Frank. A quick question. How fast are your LVT sales growing across the business since we can't see it with a lot of that in the acquired sales line?

We don't give out granular detail by product. To give you something as a long-term direction, you know we talked about the investments we have. We have three plants that are some of the biggest and most productive in the world.

We're adding two lines to them. We get all our capacity in we'll have over $1 billion worth of an LVT capacity in our organization which I don't think there's anybody close to anywhere in the world.

Jeff, that would be including the 2017 investments that you alluded to?

Correct. That's correct.

And then just quickly on Xtratherm, you guys disclosed in the 10-K that it was $160 million purchase price. Frank, can you give us some guidance around how much sales that asset has and levels of profitability that we should expect?

The multiple was about a little bit over 1 times what the selling price was. It's just below 200.

Thank you.

Tim Wojs, Baird.

Hey guys, good morning. I just had a question and then a follow-up I guess.

The first question, Jeff, you came into the year pretty optimistic about the industry and the environment. Are you more bullish today than you were a couple of months ago about 2016 and 2017?

I think we're in the same position. We felt the markets were going to be reasonably good. We thought that our position in the markets were at the best it's ever been.

We came in expecting to invest in all the pieces and I think the biggest change is that these acquisitions take a while to get through and to assimilate in the business and what you don't want to do is exceed the organization's ability to execute. So the biggest change is the speed at which the organization has assimilated these things and I think the organization can take on more than I thought it could six months ago.

Okay, great. And then just, Frank, how should we think about the impact to FX now just given some of the movement in rates for 2016?

Your guess is as good as ours of what the rates are going to do for the rest of the year. But with the euro at $1.13 or $1.14 right now that's favorable to last year.

Okay, great, keep up the good work. Thanks.

Mike Dahl, Credit Suisse.

Hi, this is Matthew Bouley on for Mike. Thank you for taking my questions.

I just wanted to follow up on the earlier productivity questions. It seems like the productivity gains have been particularly strong in North America and in ceramic and you're starting to see some gains come through in Rest of World as well.

So just going forward, how should we think about productivity at a segment level? So where do you expect to see the greatest gains this year and over the next couple of years? Thanks.

I don't think we have that detailed information in front of us. I think what we keep explaining is that these investments we've been making aren't to look at, the investments are to increase our productivity. We have very strict strategies about return on investment and hurdles they have to overdo on one side.

On the other side the margins we're getting is because we're also investing in equipment that allows us to differentiate the products in a marketplace and get higher premiums. We talked already a little bit about the laminate business. We're investing in our older equipment in our ceramic business to make bigger sizes and smaller sizes which most of our competitors don't have the capability.

And so these investments are helping the mix as well as the cost in all the different categories. And again like I said, if we can find more of them we'll do them.

Got it okay, thank you. And then just on the repair and remodel market in the US, just curious how you saw R&R play out during the quarter, so if you saw an acceleration in the market and into April or if you've seen things maybe moderate a little as we exited the quarter? Thanks.

It's still the slowest part of the different channels. The new construction and the commercial were better. Everything we read tells us that the consumer is going to spend more money on remodeling this year than before.

All the projections we're seeing from others, we have not seen it huge upswing from the historical trends. We're still seeing the same trends we saw in the past quarters but there's a potential that they improve significantly and we would sure enjoy it if it happened.

Got it, okay. Thank you and good luck.

David MacGregor, Longbow Research.

Yes, thanks and congrats on a good quarter, Jeff. Just question with respect to the commercial markets.

What would commercial represent as a percentage of each of your three reporting segments? And can you talk about what kind of growth you experienced in the first quarter in each?

I don't have that detail here either. Off the top of my head I would think that the ceramic business has the highest percentage of commercial in the segment. It would be the highest and the lowest would be the laminate and wood businesses which tend to have in that segment because they tend to have limited amounts in the commercial business in both categories which would leave the carpet business somewhere in between.

Once upon a time your ceramic was about 40% commercial but since Marazzi and everything else have come into the mix would it still be at around that level?

I would guess it would still be in that area.

Okay. And just as a follow-up question, you talked earlier about having fairly disciplined return on investment and hurdle rates with respect to internal reinvestment.

And acquisitions.

And acquisitions, sure. I guess a lot of focus on your growth by acquisition and how that eventually becomes an organic growth driver but as you invest CapEx back into your business, are the returns improving over the past few years or are they reflecting the pressure of a more global competitive situation?

Most of our internal investments when fully executed tend to be between two and four years and most of the acquisitions tend to be more in the five-year plus or minus ranges.

I mean, just your model has become so much more global over the last few years, I'm just wondering if that impacts your hurdle rates and your ROI discipline just because it's a more competitive situation I would guess? And what's trending there?

Are you talking about for acquisitions?

Acquisitions. I guess I was parsing this at a higher level, acquisitions and internal reinvestment.

Our internal reinvestments if they don't meet our hurdle rates we won't invest in them unless it's something you have to have just to maintain the business. And so we have processes that we go through that say if they don't reach these rates we're not going to utilize our money to go after it and find something else.

We continue to look at so one is on and tends to be the fastest things are replacing existing equipment because the risks are very low and you know that they are going to operate at fairly high levels as soon as you do them. On the other extreme, probably the difference between putting in new capacity and new product categories and something you own, what happens is it takes a longer time to build up the sales on the front end, so you have the cost and the learning curve on the front end without enough volume.

So those tend to be a little longer. So but what the difference is the returns in the first year or two are lower but when you get out to year five and six they are much higher than the acquisitions as you go through. And then the acquisitions are all over the place.

If you buy a really good business you're going to have lower returns if you buy one that's in difficulty, you're supposed to have better returns that you change the strategies within the business.

Thanks very much.

Kathryn Thompson, Thompson Research Group.

Hi, thank you for taking my questions today. The first is pulling the string again on acquisitions and particularly in the ceramic business you're moving from the floor to more applications on the tile. As you move up the value chain in terms of building products, as you expand your total product line, what is your openness to go beyond just the walls but even to look at other product categories that are tangential or adjacencies to help fuel additional growth?

We've already done it in multiple locations. For instance we're one of the largest countertop distributors in the country today and we got into it because we started out with ceramic flooring, then we went to stone flooring, then the next adjacency over was stone countertops. So we've moved into it.

So the countertop business is an adjacency we've already moved into. We get the largest benefit out of buying things that are in the categories we're in that we can leverage our knowledge in marketing and distribution across the new business. And we get the least synergies out of going into something that's brand-new.

As we get further from where we are and we've done it when we move from carpet to ceramic or ceramic to laminate or laminate to vinyl, what you see is that when you see us move into the categories we normally start by buying the best competitor in the marketplace. And the reason is we're buying the knowledge of the category as well as the business.

And we start with the best, and then what we try to do is feed it additional capital and try to see if there's other synergies between how we operate businesses, the information systems, the methodologies, and those things create more benefit. And then as long as we're staying in things that go through the same customers and channels, we can actually pull their products into our channels and vice versa as we go through.

The extent past there is going into totally new geographies, and we've gone into them both ways. We've gone into them greenfield and we've gone into them by buying what we perceive to be typically best of class in the category too. On the other hand, we break all our rules.

When we got Marazzi, we got a ceramic business in Europe that was performing horribly, and we put in a new management group in that and made that work. So I think the only thing you can say about our strategy is we have the capacity to work in all types of environments.

And taking one step further, if you were to look to three years out, and given the remarkable progress you've made in the previous say three years; but looking three years out what percentage of your sales would you believe will be to flooring and the balance being to essentially all other categories? And how does that differ from today?

You're beyond my known horizon. I can tell you that if I can find enough things to invest and the things that I have as core knowledge bases, I would prefer that over others. For me to go into the other ones, something that we don't know, we're going to have to find the right candidate that gives us the right knowledge base. And we have to be a strong base in what we do to do that; we would consider it as if.

Great, thank you very much.

Megan McGrath, MKM Partners.

Good morning. Just a quick follow-up on the sales and marketing investments, especially in the North American market.

I just wanted to get a sense obviously on the sales side those are more longer-term investments but on marketing, how should we think of that? Are these more sort of one-time, short-term investments in marketing or should we think about a higher overall level of marketing spend over the next year or so?

The biggest pieces of them are in expanding the sales force in order to get to more customers. And up until a point we said that our goal was to decrease -- to increase the margins and we were getting leverage out of it, we said last year we're going to move from driving leveraging it to increase the margins to driving expansion which we said we were going to do through expanding the sales forces, putting more investments in samples, putting more investments in displays and stores and putting out more product categories and more differentiated products which we would believe should help our business margins and market shares.

Okay, and then just a quick follow-up on that. You've talked in previous calls about specifically about expanding their Pergo brand into different categories.

I think I've seen it at some of the big box stores. Where are you in that process and how are you feeling about how it's going?

We have looked at we are actually in the middle of expanding Pergo into the LVT and into laminate and engineered wood in different categories and then we're looking at finding the right partners and distribution channels to do that. And we're at various stages throughout the year in implementing those things.

Okay, thanks.

Your next question --

Just to make a note, Pergo is the most known brand in the flooring industry. So utilizing it and optimizing it across different product categories we think is a big opportunity.

Michael Rehaut, JPMorgan.

Good morning. Thanks. First question I had was just on the overall outlook as it's coming together for demand for 2016.

Jeff, you mentioned in your opening remarks that first quarter has exceeded expectations and also pointing to perhaps the potential for repair remodel in the US to accelerate in the back half. So I was wondering if you could give us a sense of how that impacts your outlook for organic growth for the Company for the full year?

I mean at this point obviously doing 6% organic on an adjusted basis is very, very solid. Would that type of organic growth, should we expect for that to continue throughout the rest of the year?

Listen, you're clever, you're trying to get me to give you future estimates beyond the one quarter I give you. I think that we're going to see a good year in the category. We've said that we think it's going to be the trends of the industry will be similar to last year.

You said it right, the biggest opportunity is for the remodeling business to increase because the big upside there is not only has it more volume, the mix of the products are higher and the higher margin. So those are opportunities to go there.

I think all things are in place to increase our mix, our margins as we go through. And I think what we've said is we anticipate the incremental increase in margins to be slightly less than they were last year. It gets harder and harder to keep pushing up the margins and the sales we'll get to see with you when they happen.

No, I appreciate that. And second question just on the investments, a lot of discussion around that.

But when you talk about again just so I understand it fully, the $1.2 billion to $1.4 billion that you expect to realize over the next three years, so I guess I'm thinking 2017 through 2019, is there a way to think about that amount of sales relative to just supporting your ability to grow with the market versus market share gains? In other words, given that you're at capacity in different of your plants, it sounds like part of this is just needed to meet the market growth itself. So any kind of help on that $1.2 billion to $1.4 billion around what's in other words supporting the just natural market growth versus what might be thought of as in terms of share gains would be very helpful.

I'm not sure I have an answer that's easy for you. I mean you're right at the size we're at, 5% of $8 billion is $400 million to grow 5% a year.

We're putting in capacity for multiple years as well as going into new product categories which takes further. So if you say you're going to grow at these rates for time it requires these investments to do it and we're putting them in ahead in order to support it. How much we're going to take and share and not I don't really know how to answer the question.

Okay, maybe we'll circle back on that later. Thank you.

James Armstrong, Vertical Research Partners.

Good afternoon, thanks for taking my question. First one is on the market share of LVT in general, what do you think the market share of LVT as a percentage of total floor has grown to and what do you think the trend is in the next few years?

So we're talking in the US market.

US and globally.

I'm not sure I know all those numbers off the top of my head. I think in the US it's probably in the 7%, 8% range today. We think it's going to grow mid-teens as a category, so the 7% or 8% in dollars would be about $1.4 billion maybe today and you can figure $200 million a year, 15% give or take.

So there's a lot of requirements, it's growing. The difference in it and laminate, for instance, it is in every market in every category where laminate wasn't is it. And we'll get to see how far it grows over time.

As you can tell from our position we think we have leading technology in the manufacturing of it. We think we have unique knowledge in the style and design of it which we get from both our ceramic and laminate and wood businesses that we already have. And so we're positioning ourselves to be a leader in it.

That helps a lot. And then switching gears, you talked about picking up market share in Russia and that should help when the market over there improves. What do you think your market share in Russia has grown to and what do you think it can do in the next few years as well?

I think the Russian market has probably declined 35% in total since the things started down. Our business is up and so we're taking share from somebody. Some of it is coming from imported products that have gotten close to disappearing from the marketplace which at one point were a large part.

I would guess our share is probably somewhere in the 15% share as we start. Our strategy in Russia is we are focused on the mid- to high-end part of the marketplace. We have the only brand in Russia.

We have owned distribution across Russia. We have about 300 and something franchise stores across Russia which we own about 15%, 20%. So we're well-positioned in the high-end part of the marketplace and we think we can keep exploiting it.

We're basically running all our capacity and then we're putting in new capacity this year that actually makes more higher level of product that historically would have come out of Italy. And our intention is to become the premium supplier of it.

And that is where we are. And we think it's a good opportunity. If the market ever turns around we'll be in really good shape and the negative at the time, though, is our margins are declining as we're driving our business through the market.

That's helpful. Thank you very much.

Eric Bosshard, Cleveland Research Company.

In terms of the SG&A investment, the sales force and the sample investment that you're making, I think SG&A was flat as a percentage of sales this quarter. As we move forward how should we expect that to perform both in terms of how you're strategically managing it and how the timing of the investments lines up?

What you see is the total, so what you're really seeing is higher investments in certain categories offset by continued leverage in other ones. So presently it's about flat.

As we go through the year you should see some improvement in it even though we've been increasing others. So we expect the investments to level out and get some benefit from those as we go through the air. But you still have large parts of the business that are decreasing those costs as a percent of sales.

In a similar vein as you think about startup costs for the capacity adds, where are we in that continuum? Does that number increase and then level off or is the 1Q representative of sort of what the peak of that might look like? I'm thinking about how that impacts the margin of the business.

Let's see, I think this year the startup costs in the first quarter were around $10 million --

$10 million in the first quarter and we could see $25 million to $30 million for the full year.

This year.

And we'll have more startup costs in next year as well.

And then lastly, just to circle back on revenue, the payback on the revenue line, excuse me, the payback from these investments you've talked about is to sustain or drive revenue growth. As you look at where you are now and where you've been, are these investments to sustain the current rate of growth or to create incremental growth versus where you are now?

Yes in both, in all categories. So let's talk about one. My ceramic business in North America, I'm selling basically all I can make.

I am supplementing it with product out of my other manufacturing regions. We have a new plant coming up. And so we think that the ceramic industry could grow this year in North America 5%, 6%, could be more or less.

So we have to have -- and it takes about a year and a half from the time you start the project to get the capacity up. So what you see is our investments are supporting the things a year, a year and a half out or more. If we don't invest now we won't have it then.

Okay, that's helpful. Thank you.

Bob Wetenhall, RBC Capital Markets.

Hey guys, my question has been answered. Everything was crystal clear. Thanks very much.

Laura Starr, Nuveen Asset Management.

Hi, how are you? You answered a question earlier about how those adjacency businesses, the non-flooring whether its wall or countertop businesses are growing. And I actually just had a question sort of on the wall surface businesses.

I know that is growing very nicely. Is that all in the tile business or are there wall surfaces that are actually engineered surfaces?

And where's the demand coming from mostly? Is it a consumer demand, is it commercial demand, hospitality, office, healthcare? If you could just give a little more information on that.

The business that we're putting on the wall is mostly ceramic tile and ceramic wall tile is expanding. There is a trend in the marketplace to put decorative walls using various surfaces from wood to laminate to ceramic on the walls as we go through. It's a trend that's just starting.

We think it's going to continue expanding and we're trying to figure out how to push the strategy even faster with people decorating pieces in there. There are some new technologies in ceramic to make really large wall spaces out of ceramic, for instance, could be a new opportunity down the road. Any of the product categories we make could be used as decorative pieces but not as coverings over 100% of the walls.

And in commercial versus consumer right now or where do you think it's going?

I think it's going everywhere.

And then this decorative stuff, that's obviously going to be a much higher margin, right, versus just plain old tile on the floor?

It will be when the category now, when you start getting to create new markets and new things they take a while to mature. So when you go into new products it doesn't happen overnight.

Okay, thanks.

There are no further questions at this time. I would like to turn the call back over to Mr. Lorberbaum. Please go ahead.

We had a good quarter. We think we are well-positioned for the future and we are trying to take advantage of all the opportunities we can identify and we appreciate you joining us. Have a good day.

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