莫霍克工業集團 (MHK) 2016 Q3 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 third-quarter 2016 earnings conference call. (Operator Instructions) As a reminder, ladies and gentlemen, this conference is being recorded today, Friday, November 4, 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 third quarter of 2016 and provide guidance for the fourth 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. In the third quarter, our growth strengthened and our margins continued to expand. Our earnings per share for the period were $3.62, a 25% increase over the prior year, or $3.50 per share excluding unusual items, an increase of 17% and an all-time record for the Company.

Our strategy of investing in our existing businesses as well as synergistic acquisitions continue to deliver record results. For the period, our operating margin excluding unusual charges improved 160 basis points to an all-time high of 16% as a result of higher volume and productivity. Our revenues as reported for the second quarter were $2.3 billion, an increase of 9% on a constant days and exchange rate basis.

Our organization continues to create new products with greater value for the consumer, to introduce unique ideas that enhance our processes, and to invest in technology and equipment that improve our cost, quality, and service. The four acquisitions we completed in 2015 contributed to our results as we enhanced our performance by upgrading their offerings, expanding their distribution, and improving their productivity.

As expected, excluding unusual charges, our SG&A costs as a percentage of sales improved 60 basis points as our investments in sales personnel, marketing, and merchandising increased our sales and mix.

In many of our product categories and geographies, our operations are running at or near capacity. These include all of our Global Ceramic, laminate, and sheet vinyl assets.

Additionally, we are currently selling all of our LVT we are manufacturing, even as we continue to increase our production capacity in the US and Europe. To meet our growing customer demand, our capital investments this year will be the highest in our history, as we invest almost $650 million in additional capacity, more efficient assets, and new products.

Our strong results have increased our cash flow, enabling the expansion of our capacities and the pursuit of attractive M&A opportunities. We continue to explore potential acquisitions from around the globe that complement our business and expand our geographic reach or product categories.

In late October, Moody's noted that the US consumer spending is growing at a healthy pace through the job creation and wage growth, higher disposable income, strong consumer credit, and pent-up demand to replace aging goods. The National Association of Homebuilders affirmed that single-family housing demand should continue moving forward in the months ahead and that remodelers nationwide are seeing increased demand.

Harvard's LIRA index likewise projects strong gains in home renovation to continue into next year, with activity stimulated by rising home values and tightening existing home inventories. The October Architectural Billing Index pulled back slightly, although AIA expects commercial development to rebound after the presidential election.

The European Central Bank remains committed to keeping interest rates at historic close and buying bonds through at least March of 2017. Although Russia remains in a recession, economists believe the economic slowdown is nearing a bottom.

I'll now review our third-quarter performance by segment. Our Global Ceramic segment's sales rose 4% as-reported, and 6% on a constant days and FX basis, with currency translation in Mexico and Russia negatively impacting our sales as-reported by $5 million during the period. Operating income for the segment, excluding unusual charges, grew 13% over last year due to improvements in volume and productivity.

Our North American Ceramic sales trends improved from the second to the third quarter, and operating margins expanded over last year. New home construction in the commercial sector outperformed residential remodeling, and sales growth through our regional service centers outperformed other channels.

The higher average selling prices of our new product introductions were partially offset by pressure on commodity products. We're introducing larger sizes and three-dimensional wall tiles to extend our design leadership.

We've been operating at full capacity and supplementing our domestic production with imports from our global assets and other sources. Our new Tennessee plant is fully operational and improving throughput. With the facility's state-of-the-art capabilities we are developing unique styles and larger sizes that will enhance our offering.

We continue to upgrade the merchandising in our service centers to broaden our customer base and drive higher sales. New paperless systems and processes in our service centers are increasing our ability to satisfy our customer and increasing our productivity.

Sales in Mexico continue to expand faster than the market, which is up more than 10% in volume this year. We are broadening our product offering and distribution in preparation for the expansion of our Salamanca plant, which will be operational in the fall of 2017.

We have reduced the complexity of our US operations as we realigned our plants by product types and increased capacity allocated to the Mexican market. This year, hundreds of projects are enhancing productivity at all our facilities, reducing the cost of our materials and improving the service and efficiencies of our logistics network.

During the period, we successfully upgraded our ERP system with a well-executed implementation. The capabilities of our organization are improving daily and over time this system will enhance our performance with new functionality.

Our European Ceramic sales grew significantly in both Western and Eastern Europe from our sales and product strategies focused on local markets and preferences. In Western Europe, our investments in state-of-the-art equipment have allowed us to bring unique products to market and expand our margins and mix. Our product introductions during the last two years have made us a leader in wood, stone, and ceramic visuals and large and small formats.

We're expanding our participation in the commercial channel by increasing specifications with architects, designers, and property managers. We will complete the upgrading of our high-end commercial assets by mid-2017, which will finish the entire overhaul of the Italian operations we acquired in 2013. We're also entering the ceramic slab business and anticipate production of countertops and large ceramic wall coverings by the end of next year.

Our Eastern European Ceramic business improved as we expand the capacity in Bulgaria and upgraded the style and design of our products. We're shipping products from Bulgaria to the US and Western Europe to grow our business. We're in the process of transitioning Our Bulgarian operations to our Italian operating system, and we expect this project to be complete in the first quarter of 2017.

In Russia, the economy appears to be bottoming out and our Ceramic business there is operating at capacity. During the period, our sales improved on a local basis as we increased our participation in the new construction sector and expanded our distribution through investments in owned and franchise stores.

Sales of our new product introductions have reinforced our style leadership and improved our mix and margins. Next year we will install new capacity to enhance our offering and support additional growth when the Russian market improves.

Our Flooring North America segment improved as expected, growing 6% as reported or 7% on an adjusted days basis. Excluding unusual items, the segment's operating margin expanded to 15% from higher volume and productivity, as well as lower SG&A as a percentage of sales.

During the quarter, both our soft and hard surface flooring increased, with hard surface growing faster. Our commercial carpet and rug sales offset softer residential carpet, which was impacted by polyester growth and pressure on commodities.

Our premium Karastan brand continues to grow, with the expansion of our product offering and increased distribution. The SmartStrand Naturals collection we introduce this year is positioned at the high end of the market, reinforcing our leadership in the premium category.

Product innovation continues to drive our business, with recent introductions comprising about one-third of our carpet sales during the period. Our commercial carpet performance continues to strengthen with all and markets growing.

We've expanded our commercial salesforce and are increasing our participation in individual projects and large national accounts. We announced a residential and commercial carpet price increase of 3% to 5% effective January to cover increased costs.

A new carpet pad plant is being completed to service the Southwest region adjacent to our ceramic plant in Mexico near California. Our rug sales grew during the period as we introduced new fashion forward collections and entered new categories with outdoor rugs and utility mats.

Our hard surface sales of laminate, wood, LVT and sheet vinyl continue to grow significantly with expanded margins. Our sales of these products are constrained by our present capacities, which are in various stages of expansion. Our participation in all channels is increasing as a result of the investments we have made in sales, marketing, and innovative products.

Improvement in our LVT production continues to increase our capacity and broaden our product offering. We're adding new capabilities to our LVT manufacturing plant, which will provide new product features next year.

We're in the final stages of completing our new engineered wood plant which would allow us to introduce larger sizes with unique finishes. The expansion of our laminate plant in 2017 will satisfy the increasing demand of our premium collections with superior performance and realistic visuals.

Our manufacturing productivity across all product categories continues to positively impact our margins. Innovation in every process is driving cost and quality improvements. We're expanding our trucking fleet across the country to improve our service and cost position.

Our Flooring Rest of the World segment performed well during the period, delivering a 15% increase in sales as-reported, and a 41% improvement in operating income on a constant-currency basis excluding unusual items. On a legacy basis with constant days and FX, sales rose 8%.

SG&A as a percent of sales continued to improve during the period. We're increasing prices based on market conditions to offset currency fluctuations.

Our European flooring growth was led by LVT and wood, partially offset by lower sheet vinyl sales due to the disruption of production at our Belgian facility. Our laminate business continues to grow due to the strength of our Quick-Step and Pergo brands in the premium part of the market. We are leveraging the strong performance of our 2016 laminate introductions by expanding designs and sizes we offer.

Our European and Russian laminate plants are operating near capacity, with expansions planned for Europe the end of 2017 and Russia in 2018. We are currently implementing process improvements to incrementally increased throughput and reduce cost.

Our wood business continues to expand, and we've raised prices to offset material increases and currency changes.

Our LVT sales are increasing dramatically and our margins are expanding as the product mix and productivity improve. In the period, our LVT sales were limited by our capacity, which has recently been increased.

By the end of the year, we will further modify our processes to expand our production even more. In the interim, we are supplementing our LVT collections with sourced products to satisfy customer demand. We've begun construction of the building for our new LVT line, which should be operational the end of next year.

Our sheet vinyl sales during the period were lower as a result of a fire at the end of the second period. The Belgian plant is now fully operational, and we do not anticipate any long-term impact. Our insurance will cover the majority of these costs.

We continue to expand our commercial sheet vinyl sales and have announced price increases to help offset currency changes. Investments we have made to improve our costs of MDF and chipboard are increasing our margins.

Our roof panel business remain steady. Sales of our insulation boards continue to grow, although lower material costs and manufacturing improvements are being offset by increased competition and unfavorable exchange rates. We are realizing the anticipated synergies from the integration of our Xtratherm acquisition.

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 $2.294 billion and grew about 7% both as-reported and using constant exchange rates and days for our legacy business. We had one less day in the third quarter and we will have one more day in the fourth quarter compared to last year.

All segments had good growth. As we stated last quarter, our Q2 sales growth was lower than expected, and we anticipated that to help the Q3 growth rate. We do not expect to maintain a 7% growth rate going forward.

Our gross margin as-reported was 31.7%. Excluding charges, the gross margin was 32.4%, up 100 basis points versus last year, driven by growing productivity and higher volume. Our SG&A as-reported was $348 million or 15.2% of sales. Excluding charges, SG&A was 16.4% of sales, a 60 basis point improvement over last year.

Unusual charges this quarter were a net benefit of $12 million. This is comprised of a $90 million cash receipt for a legal settlement, partially offset by $48 a million noncash charge for a trade name writeoff where we've changed our commercial carpet business brand focus, and a $30 million restructuring charge of which approximately half is cash.

Our operating margin excluding charges was 16% and is up 160 basis points over last year. Interest expense ended up at $9 million and decreased due to the redemption of higher rate bonds in January of this year and the introduction of a lower rate commercial paper program.

Other expense as-reported was $5 million and includes approximately $3 million of an indemnification receivable recorded last year for our IVC purchase accounting. We have an offsetting tax benefit as a related tax liability was unwound.

Our income tax rate was 26.4% for the quarter, and that compares to 21.9% last year. We expect our fourth-quarter tax rate to range between 23% and 24%, and our tax rate for the full year next year in 2017 to range between 26% and 27%.

Earnings per share excluding charges was $3.50, up 17% over last year.

If we turn to the segments, in the Global Ceramic segment sales were $822 million or up 4% as-reported. They increased 6% on a constant days and exchange rate basis. We had very strong growth both in Europe and in Russia in local currency, with North America growth rate improving over the second quarter.

Our operating margin excluding charges was 16.6%; that's up 130 basis points over last year. Contributing to the growth over last year was productivity of $14 million, volume of $6 million, and a positive price mix of $7 million, partially offset by $4 million of SG&A investment.

In the Flooring North American segment, sales as-reported were $1.009 billion, up 6% -- or up 7% using constant days -- with the hard surface categories outpacing soft surface. In soft surface both rugs and commercial carpet grew faster than residential carpet.

Our operating margin excluding charges was 15.3%. That's up 140 basis points primarily from productivity of $16 million and volume of $12 million.

In the Flooring Rest of World segment, sales as-reported were $464 million, or up 15% over last year. Our legacy business was up 8% using constant days and constant exchange rates.

Our operating margin excluding charges was 18.4%, up 250 basis points. It was positively impacted by productivity of $10 million and volume of $11 million, plus deflation of $7 million. FX negatively impacted operating income by approximately $5 million, primarily from the British pound. We're planning to offset this sterling headwind next quarter with price increases.

The Corporate and elimination segment had an operating loss of $10 million, and we expect this to be about a $36 million to $38 million loss for the full year.

Jumping to the balance sheet, receivables ended quarter at $1.506 billion. Our days sales outstanding were up to 56 days compared to 53 days last year due to change in the channel mix.

Inventories ended the quarter at $1.673 billion. Our inventory days improved by 1 day to 104 days in the quarter.

Fixed assets were $3.341 billion and included capital expenditures during the quarter of $184 million, with depreciation and amortization of $104 million. CapEx for the full year is estimated to be approximately $650 million, with depreciation and amortization for the full year of $410 million.

Long-term debt was about $3 billion. And our leverage debt-to-EBITDA ratio was 1.6 times. Jeff, I'll turn it back over to you.

Thank you, Frank. Today, Mohawk is in the best position in the Company's history. This year we're investing at our highest level ever to meet increasing demand around the globe.

We're preparing for future growth by expanding our differentiated product offerings and increasing the capacity and efficiency of our operations. With our continued investment in manufacturing technology, we're introducing distinctive collections to improve our sales and enhance our mix. We're aggressively implementing productivity improvements across the enterprise in all facets of our business, and we're bringing new capacity online to support our growth.

This year, our strong operating results have expanded our cash flow and reduced our leverage to historically low levels. We're currently exploring numerous investment options to further our expansion, including greenfield opportunities and acquisitions to broaden our geographic presence and product portfolio.

Taking these factors into account, our EPS guidance for the fourth quarter is $3.16 to $3.25, which represents a 12% to 15% increase over our fourth-quarter 2015 EPS, excluding any restructuring charges.

I'll now be glad to take any questions.

(Operator Instructions) Bob Wetenhall, RBC Capital Markets.

Good morning. What a fantastic quarter. Thanks for all the detail, Jeff.

I was hoping you could spend a little bit more time articulating what's going on with capacity. It sounds like you're sold out in a number of markets.

And if you could give us a roadmap to think about what your outlook is for capital spending, and the timing and sequence with which new capacity comes to market, that would be helpful.

I gave it to you in the speech; I'll see if I can consolidate it a little better. In the Ceramic business, almost all of the various pieces are at capacity. We have just finished installing a new plant in Tennessee; it's up and operating almost at the projected levels already.

We have announced the increase of our plant in Mexico, which is outside Mexico City. It's going to -- we're going to double the capacity. That will be on in the end of next year.

Moving to Europe, we're replacing the balance of the assets that we acquired in the high-end part that are focused more on the high-end commercial part of the business. There should be in place sometime about midyear, I believe.

In addition, (technical difficulty) capacity to go in a new product category which makes ceramic slabs. Those can be used for countertops and walls and other pieces as well as floor.

We have recently increased the capacity in Bulgaria. There won't be any more in it next year.

In Russia, we're increasing our capacity next year to prepare for the Russian market to improve.

Let's see if we can move around the world. In the -- I'll combine some of these, because they are intertwined.

In the laminate business, we're using all our capacity in the US, Europe, and Russia presently. We have expansion plans for all three.

Some of the equipment is going to be off -- it's going to take a while to get it in. We will expand the US in the fall of next year, followed by Europe and followed by Russia. It's just a matter of timing of the supplier to get the equipment in.

In the wood business, we're just -- we have been putting in a new engineered wood plant which is in the middle of starting up this fall in engineered wood, which is also running at capacity.

The LVT businesses, we're running all the capacity we have in the US and in Europe. Both of those are making incremental increases as we speak, in each one; and they'll continue to do so probably through the first quarter of next year.

We are in the process of adding another production line in both Europe and the US, which will be working in the end of next year. And total combined we'll have about over $1 billion of capacity in LVT as a new category.

There are some other smaller things like we just put up a new pad plant in the western United States which will fill out our padding strategy across the United States. We have put in new capacity to make two new types of rugs recently, and we're looking for alternatives everywhere.

The best investments we can make are the ones in internal investment. They have the highest paybacks and the lowest risks.

The only negative is some of them that we go into new geographies and pieces, you tend to lose money for the first year or so as you are ramping them up and getting enough volume to go through them. If I could identify twice as many, I would spend it.

It sounds like you're keeping busy. What are your -- and maybe this is for Frank. What is your best guess on a preliminary basis for capital spending in 2017? You're going to maintain the same pace in terms of internal investment opportunities. Is it going to be a $600 million or $700 million number?

And I was just hoping you could step outside the quarter and maybe just talk on a bigger-picture basis. It seems like you're getting a lot of margin expansion. Is there any way through gross margin performance or EBITDA you could talk about the margin benefit you're getting between -- splitting it between productivity improvements and favorable operating leverage?

I'm just trying to do a step-through or a walk-through to understand how CapEx can drive productivity enhancement.

Thanks and good luck. Great quarter.

Thank you.

This year, as we mentioned, we're spending about $650 million in CapEx. It will remain elevated and next year probably be more than that. We've not finalized the plan yet, but it's a high likelihood it would be more.

I think if you look at the CapEx we're spending this year and broke it down into three buckets -- maintenance, capacity, and productivity margin improvement -- maintenance is about $100 million. And then of the balance, this lapped -- about two-thirds of the spend is going towards capacity; and about a third of the spend is going towards margin improvement and productivity. Next question.

Stephen Kim, Evercore ISI.

Well, thanks very much and let me also add my congratulations. It seems like you guys never run out of things to keep yourself busy with.

So, running through all that capacity that you just did, I know in the past you have given us some guide on what you think the combined potential sales that can be supported through this capacity is. But it's a moving target, obviously, because you keep doing more things.

So can you give us an updated view on what you think the capacity expansion you've been putting through and by the end of -- should be done, I would guess, by 2018, what kind of expansion in sales that can support?

The last time we gave a number it was between $1.2 billion and $1.4 billion, but I'm not sure it includes everything that's in the plan going forward. But that's as close as I have at this minute.

Okay. But it's going to be higher than that, clearly, in light of everything that's been going on. Okay.

My second question is -- lots of things I'm sure that will be asked. But just generally speaking, I was curious if you could talk about on the M&A front, how Brexit and maybe even more broadly the overall change in tone, moving against issues of free trade, how that, if at all, has affected the way you think about M&A in Europe versus the US.

I don't think it really impacts the way we look at it. We take each business, depending upon its geography, and we determine what the risks are within that business. Most of our businesses -- matter of fact all the businesses -- the majority of what we sell is in the local markets in the same currencies. So we really look at it, at how the market's going to change.

What we do across currencies is relatively small and secondary to the core businesses that we're trying. So the biggest questions we have -- depends on where you go -- is the political environment, the exchange risks, and how those impact the competition as we speak. And we require different returns based on the risk levels we do, and it makes it more difficult to do things in certain markets than others.

On the acquisition side, we're always looking at acquisitions. We remain disciplined to ensure that we're taking the proper risks and getting the returns for it.

At this point, our balance sheet and organization really allow us to pursue multiple opportunities at the same time if we can find the right ones.

Got it; appreciate it. Thanks very much, guys.

Michael Rehaut, JPMorgan.

Thanks. Good morning, everyone, and congrats on the quarter. First question, Frank, you referenced the 7% organic number in the third quarter and cautioned not to expect that type of a run rate going forward. But just looking at the guidance for the fourth quarter, it would seem that to get to that number you are probably still talking towards or getting at a good, healthy mid-single-digit organic growth rate. Is that correct?

I think what I said is it's not going to be 7% going forward, but I think it's going to be more than what we saw in the second quarter -- if that helps.

That does. Just also thinking about 2017, also on the top line, obviously referencing all the different types of capacity projects and the amounts that you're spending over the next couple years, that's going to obviously benefit the top line. A lot of the capacity, I believe, that you just outlined before, Jeff, looks to be coming online, let's say the majority of it mid-to-late 2017.

So how should we think about the impact on top of what you'd call end-market growth? What type of incremental impact might we expect the different capacity projects to benefit sales on top of that? Would it be a 1%, 2% number? Or is this really more of a 2018 event?

There's so many projects at different times; they flow in. I mean, like, we just finished a ceramic plant in Tennessee that's running almost wide-open already. So I mean that's already happening.

We have a wood plant that's coming up; by the end of the year, it will be running full. I mean a lot of the capacity is coming in all through the period, and it's to support the business.

As large as we've gotten, in order to support the growth rate it takes a significant amount of capacity to keep growing at these rates across the business, as big as we've gotten. And we're committed to keep the growth up.

Okay. One last one if I could, just on the margins. Fantastic performance there as well. I think, Frank, you've talked about it in the past you've done 400 basis points consolidated over the last two years, or on track to do.

Again, with some of the capacity projects coming online, would you expect that to be dilutive at all? Or how should we think about the pace of margin improvement going forward into 2017?

Mike, I think margins going into in 2017 in the Ceramic North American segment will continue to improve. And then as we pull out the IP business out of the Rest of World segment, the margins in that remaining non-IP business will continue to improve as well.

We try to have a philosophy not to go on profit holidays.

Great. Great; thanks a lot, guys. Appreciate it.

Eric Bosshard, Cleveland Research Company.

Good morning, Jeff. Two things. First of all, inasmuch as you know, curious on your growth rate relative to your end markets' strong growth. Wondering if that's what you observe in the market, or if you believe you're gaining share.

Then, secondly, on the strong North America up 7% number, which is the best out of that segment a while, I just would love the little bit more detail of what drove that and where that number should be expected going forward.

I would guess in the US market the flooring industry is going to grow 3% to 4%. Spread across all different pieces, and it depends on which parts you are participating in to do it; and each piece is different.

My best guess is that that will probably be will happen next year at this point. And we're hoping to do better than that.

What was the second part of the question?

The North America performance in the quarter.

Part of it was the second quarter was a little lower than we expected. Some of it got pushed in there.

The other is the ramp up of our LVT sales in here with the new plant coming up. All the investments we put in, in sales and marketing and new products over the last 12, 18 months, these things don't just show up at one minute. It's all the activities that we started.

We talked about last year about upping our investments to drive business in North America and other places, and we're getting the benefit of that a year, year and a half later.

Okay, thank you.

Stephen East, Wells Fargo.

Thank you; good morning, guys. Jeff, just a couple questions around the revenue growth again. Sort of following on Eric's.

Do you think the sellthrough in the industry, particularly in North America, was at the same pace as what you all were doing? Or do you think there was something unique that was going on that maybe you all were selling in faster than the sellthrough was going out?

Then the Ceramic, we're typically used to seeing Ceramic growing faster than your North American business. Is this just because of your issues on capacity constraints, or you think there is a shift in what the market is? Which one is driving the market, if you will.

Each category is growing differently. So what happens is right now you have LVT has started from a relatively low base; it's being accepted in the marketplace, and it's in the same place that laminate was in the early, mid 1990s, 2000s. So with the investments we're putting in it, it's pushing it up.

On the other side, you have the wood business that tends to be driven a lot by the new housing construction. Has a much bigger piece in new housing, so it's doing better than the market in total.

So those two pieces are helping it. And then all the other activities we're trying to do to improve our own business relative to the market are helping our other parts.

Okay. So it sounds like the sellthrough is matching up with what you all delivered then, just taking share out of it. Is that a correct assumption on that?

Then the last question I've got, your price hikes that you're implementing, your past experience, how much do you think that will -- how much of it typically sticks? And then are these price hikes just taking care of the inflation you've seen, or is it trying to get out ahead of where you think this inflation curve is going with raw materials?

We're in the very first initial stages of it. We just recently announced a 3% to 5% increase.

It's to cover raw materials, energy, labor, medical benefits in it. We'll have to see how it evolves. We need the increases to cover the cost changes we go through.

On the other hand, we're going to remain competitive in the marketplace. That we always do.

Historically, these things start out and, as the prices get more finalized in the market, some go up more; some go up less.

All right. Thanks a lot.

Scott Rednor, Zelman & Associates.

Hi, good morning. Question for you, Frank, on the padding income. I think earlier this year you guided to it being down in 2016. I wanted to check that that's been -- that's followed that trajectory. And maybe you could just reiterate the outlook for the rolloff in 2017, if any way that's changed.

Yes. Royalty income improved due to some increased LVT sales and recovery of some old fees. And next year -- so that was this for this year that I was speaking to. Next year, we anticipate royalty income to be in the $65 million range to $70 million range, with about a $35 million run rate after the patent expires at the end of May.

Then a bigger-picture question for you guys on the countertop side. That's come up the past couple calls now.

Maybe, Jeff, how long has that opportunity been available to you? And is there any risk that you're going through a different end channel or different customer? How do you think about that opportunity relative to what we see externally as core Flooring?

I don't want to get you confused. We have a countertop business which we act as a distributor in the United States. And we're one of the largest distributors in the United States in a fairly fractured market.

The ceramic countertop business started a limited number of years ago in Europe, and it is just ramping up in Europe. It takes a while to get the market to accept it.

That same product in the US is in it's really infancy. So it's a very small part of -- it's almost none in the US it's so small.

So we're starting in Europe, where the market is already starting accepting it. We'll be shipping product from there to the US.

And over time if it makes sense, we will put in more capacity in the United States. All that different than the quartz business which we also sell through our distribution.

Kathryn Thompson, Thompson Research Group.

Hi; thank you for taking my questions today. Really tagging on the prior question, more conceptually, I know that you've given some detail on your countertop business and expansion. But as you think about growing outside just Flooring and into other categories, could you give us more color in terms of strategic thoughts as you look over the next two to three years on where you'd like to grow, as you think about M&A beyond just Flooring?

Let me start with Flooring before we leave it so soon. We are really in an unusual position of most businesses around the world that we have the capacity to expand our Flooring business into all parts and geographies around the world. It gives us the opportunities to greenfield and/or acquire other flooring businesses that we think we can add value to and gives us a much broader market to play in.

Beyond that, at some point it wouldn't be unusual for us to add another product category to our business, and there are a lot of options to do that. We haven't chosen one or we would already be in it yet.

I was just hoping a little color on what the most logical in your mind would be.

Listen, the closer a business is to our historical business, the more value we can add. The more we can influence the manufacturing, the distribution, the style and design of it -- so the closer it is, the better.

On the other hand, we have shown -- as we started out in a carpet company, we didn't know anything about ceramic and we've become the largest ceramic producer in the world. We didn't know anything about LVT and we're going to be the largest LVT producer in the world recently.

So we look at it as -- each one as they -- as we find the right opportunities and the value in, we take them on a one-off basis. And we really think that we can participate in many things in the world.

Okay, great. My follow-up question. Once again you said earlier in the Q&A that flooring industry is projected to grow 3%, 4% this year and also into next year. But in terms of the delta of your growth, how much of the upside was driven by market share gains? For instance, in big box and the soft side.

Or is it -- would you attribute the upside to greater -- to just your increased sales efforts? Thank you very much.

Any answer I give you would be a guess. The data on market shares -- there is limited data out there. Where it is out there, I don't have full confidence in what the numbers mean quarter-to-quarter. They are influenced by a lot of pieces.

I think that we're probably doing a little better in some categories in the marketplace than most.

All right. Thank you.

John Baugh, Stifel.

Thank you. Good morning, and my congrats as well. Jeff, could you tell us where you are in laminates with a waterproof technology and how important that might be to the future of laminates?

In laminates, we participate in laminate in the mid to high-end part of the business and very little in the commodity part. And there are reasons for it, which is that there are really different assets to make highly styled, highly designed products efficiently than there are making commodities. So that's where were set up.

If you're going to participate in the better ones, you have to keep coming up with new, innovative ideas to drive it both in style and features. And we are the leader in the category in total.

One of the problems with laminate and wood is that it's impacted by water and moisture in the house. So we've come up with a technology that allows us to give it dramatically better performance than the other products in the category, and part of our expansions are to support the expansion of that in the marketplace.

So it's just one of many. And if you're going to be the leader, every year you have to keep coming up with new ones.

And, Jeff, I have a follow-up question. But just on that quickly, where are we being, say, water-resistant versus waterproof?

Then my follow-up question is simply: Any indication of roughly what your run rate of sales in LVT are currently? You gave us a $1 billion production run rate. And what you're sourcing versus making in-house currently. Thank you.

Let's see, the first question was on moisture. There's no way to make anything out of wood completely moisture repellent.

The technology that we have, if you spill things on them usually you clean them up, and the technology is in the 24 to 48 hours. Ours is -- almost nothing happens to it, where the competitive products I mean dramatically degrade in the time. So we see that as a significant value proposition in the marketplace.

On the other ones, we don't give out the specific numbers of individual product categories in our segment I'm sure you're aware of.

All right. Will you be replacing, say in the next 12 to 18 months, in-house production versus sourced? And will that be a margin helper? Thank you.

Our goal is to continue expanding our business, and the best thing that could happen would be that I need to keep sourcing significant amount.

All right. Good luck.

Tim Wojs, Baird.

Hey, guys. Good morning; nice job. I guess my question, just maybe to put a little finer point, Frank, on productivity. I think you've been running maybe $30 million, $35 million a quarter from an EBIT perspective this year.

And if you're spending more next year on CapEx, is there any reason why that run rate wouldn't continue into 2017?

First, just to state, we've got a tremendous number of projects -- I think we've said hundreds of projects -- across the business that people are working on, both capital investment as well as process improvement, that are driving those productivity numbers. We're in the process now of putting together our plan for next year.

We've got a very long list of projects for next year, both CapEx and process improvement. So we'll continue to generate good productivity numbers next year. But I don't know the number at this point.

Okay, okay. Then just on the commercial business, there is a little bit of worry that that business could slow down in 2017. I'm just curious what you're seeing, and maybe just some color on the investments that you're making in commercial today. Thanks.

The commercial business I think in general probably has weakened a little bit. I think that our product offering, our investments in sales and marketing are helping us improve our position in the marketplace at this point.

We have a very high part of the ceramic market that we do. At the same time, the LVT -- a large part of LVT is going into the commercial business. The carpet tile business is growing for us, and these investment in salesforce and product design and features and benefits are helping us push all the categories through the marketplace.

So I think more than anything it's really where we started. The business is in the best position from a manufacturing standpoint, from a cost standpoint, from a product innovation standpoint, and execution standpoint. And it's helping us in all areas.

James Armstrong, Vertical Research Partners.

Good morning. I'd like to add my congratulations as well. First question is, you're obviously currently ramping up your LVT capacity quite significantly. That you said is slated to come online at the end of next year.

Given the growth in the market right now, do you think that will be sufficient? Or do you believe that there probably is room for more as we go beyond that?

It's too early to tell. The marketplace has been growing significantly. I would guess in the United States it probably grew $300 million or more this year, just in growth. It's possible it could grow that or more next year.

So there's plenty of opportunity for growth in the marketplace. The question is, as we get further along: Where is it going to plateau? And it's too early to tell.

Fair enough. Then switching gears a little, are you seeing any labor constraint issues in North America, either in your business or by your end customers? Is there any indication of that in your side of the business yet?

Hiring people has become more difficult in the business, but we've been able to get what we need. On the customer side, I think the installation is becoming tight. In some of our places it's becoming hard for our customers to find the people to install the product.

At the same time, in the trucking piece finding drivers has been a problem for a while with most people. But we've also been able to get what we need for our own business.

Perfect. Thank you very much.

John Lovallo, Bank of America.

Hi, guys. Thanks for fitting me in here. The first question is on -- could you dimension the size of the Ceramics business in Mexico and perhaps how much of that serves the US market? Then perhaps any thoughts or contingency plans if Trump does win the election and there is risk to NAFTA.

Let me think how to answer it. The Ceramic business in Mexico is about the same in units as the US business. However, the average selling price is about half. So on a dollar basis -- forgetting the conversion, on the dollar basis it's about half the size with about equal amount of units. Out of that --

So that's the industry.

That's the industry. Out of that, Mexico is one of the larger exporters into the US. However, over the last two or three years the Mexican market has been growing dramatically and it's absorbed a huge amount of capacity in Mexico. It's growing -- I can't even understand, to tell you the truth, how it's grown as much as it has relative to the economy growing in Mexico.

So what's happening is there's been a constriction of the stuff coming up into the United States, because they get higher value for it in the local markets rather than exporting it to the US.

Okay, that's helpful. Then you're clearly running at or close to full capacity at many of your plants. Just curious, though. Similar to other manufacturing businesses, is there an opportunity for you to drive additional volume by doing things like increasing line speeds or adding shifts within existing plants?

When we say we're at capacity, it means we've done -- we've already running the same seven days a week and wide-open. And then every business that's -- we have a saying around here: You're halfway there. No matter where you are, there's always ways to get more out of it.

But the more out of it, in most cases, once you've optimized it is a few percent. It's not dramatic.

Okay. Thanks very much, guys.

Keith Hughes, SunTrust.

Thank you. My question is on WPC LVT. The capacity you're adding for LVT now, is that -- can that produce both LVT and WPC LVT? Or is it exclusive to one versus the other? And generally how that works.

We think that we're building our equipment where we can satisfy any need in the marketplace with various products of different types with different features as we go through. I mean we'll be prepared to compete in all parts of the market, providing products that will satisfy all levels.

So you can produce both products in the same line; is that correct?

We'll be able to produce all of the above.

Okay. Thank you.

Susan Maklari, UBS.

Good morning. You noted that about a third of your product in the North American segment -- or a third of your sales in the North American segment are coming from more recent product introductions, especially on the soft surface side, I think.

That was a carpet comment.

Okay. As we think, though, about a lot of the work that you are doing and all the changes that are coming through, how should we think about where new products can go to as a percent of revenues either for that segment or as a whole? And what are the margin differentials between things that have been introduced, say, in the last two or three years relative to some of your legacy products?

Product innovation is the crux of all our businesses. The further you get from commodity products, the more important innovation is, because you're selling differentiation rather than price. And depending upon which business we're in, we have different participations in commodity in the other.

In all those things we continue to try to bring incremental product innovation to each one so that the customers would prefer having ours. And with that, you do get a margin premium as you bring more value to the customer, as you would expect.

Okay. Then it sounds like you have continued to make some pretty nice progress on the working capital side as well. As we think about 2017 and some of these moving parts coming together, is there more room there that you think you can realize?

It's going to be incremental. We continuously try to find ways of operating with lower inventories and giving higher service. You continually do those things.

Then at the same time, offsetting that, when you're near capacity limitations, the working capital become lower and the more important is creating more product. So in some cases, we're giving up turns in order to try to get more throughput out of the business in the short term.

Okay, thank you.

Laura Champine, Roe Equity Research.

Good morning, Jeff. I think you called out weakness in residential carpet. Is that just a continuation of the secular trend towards hard surfaces? Or was there any change in that deteriorating trend in residential carpet, or any new drivers of that weakness?

First, broader than carpet, residential replacement has not had the same robustness we would have expected going through the cycle, and it's in all the product categories as you go through. In addition, in the carpet piece there is increasing pressure from declining prices as the market growth in polyester, which sells at lower prices, has reduced the prices. And then with the overcapacity in the carpet industry, the commodity prices have gotten compressed even more.

All of those things are reducing the dollar volume of the industry. At the same time, there's been the trend to selling more hard surfaces and the use of more hard surfaces in more places, which has changed the growth rate of the entire industry. And those dynamics are continuing as they have been.

So we're trying to participate in all the pieces. We're trying to make sure that we satisfy the customers in all the different product categories.

Our goal is to have our carpet business as large as we can have it, and at the same time to optimize the other hard surface products which we participate and all the parts of the business. Then, going back to what we discussed before, having incremental innovation in everything is a huge benefit, and we spend a huge amount of effort trying to create some reasons that customers prefer ours in every single product category.

Got it. Thank you.

Brandon Rolle, Longbow Research.

Hi, this is Brandon Rolle on for David MacGregor. My question was in the Flooring North America segment. You had called out commodities pressure on the same; and how much of that was a drag on the 15% operating margin?

Then as a follow-up, I was hoping you could talk about the levels of import competition in the hard surface flooring markets, whether it be LVT, laminate, or wood flooring. Thank you.

The pricing pressure in the commodity carpet business has been going on for some time. There is excess capacity in the marketplace. It has pushed the prices and margins down in the business for us.

But I want to remind you at the same time that our North American Flooring business is operating at historically the highest margins it's ever been at. So it's just what we have to deal with, is the marketplace.

The competition from offshore is there, and it's different in different product categories. The Ceramic business, there's probably almost half of the industry comes from offshore somewhere, which includes -- the biggest piece is coming from Mexico and China, I would guess, would be the two biggest.

At the same time, the high-end stuff is coming out of Europe, is it. In the other product categories, each one is different. The laminate business, there is a significant amount used to come from China and moved to Europe. There is new capacity coming up, so it's going to move here.

You see the LVT with all coming out of China, there's new capacity coming up. It's moving to the US. So in these product categories where you can automate it, there's advantages to being local.

But at the same time in the world marketplace with exchange rates and other pieces, people dump excess capacity into the marketplace. We think that we're well suited to compete.

In the ceramic industry we're actually built -- we own different capacity to everyone. We started -- this year we've actually shipped product in Ceramic from Russia, Europe, and Bulgaria and out of our Chinese relationship into the US to support our business.

Sam Darkatsh, Raymond James.

Good morning, Jeff, Frank. How are you? A couple questions.

One of them is just a follow-up on a prior question, as it relates to your Mexican exposure. Are you hedged for 2017 for transactional impacts if the peso does devalue after Tuesday?

We as a general rule do not hedge anything. We go with the markets. We're in so many markets we're winning and losing in different ones all the time. And historically I can't say, when we did hedge a long time ago, that the decisions were optimal.

So is there a way you can help us quantify or help quantify for us the potential exposure to the peso and/or the export business?

In the peso, what's happening is we probably are gaining and losing about equal amounts. On the imports we gain if it goes down; we gain on what we bring back. But our profits translated back from Mexico go down. If it reverses, the opposite occurs.

Final question if I could. You're out of capacity in Russia, and new capacity coming online for Ceramic. Are you in the process of raising prices there?

If you mentioned it in your prepared remarks and I missed it, I apologize. I was just curious if you're raising prices there.

No, we are not raising prices there. The market is probably in the depths of the worst recession it's been at in forever.

I would guess that the ceramic Market in Russia from peak to trough is probably off 30%, 35%. Most of my competitors are struggling to stay alive. The prices are compressed over there.

And in that environment, because we have the premium position in style and design, because we have control of the downstream distribution, because we have the brand that's known in the marketplace, we're still promoting our brand through advertising across the marketplace, we are running opposite to the entire marketplace.

Very helpful. Thank you both. Have a terrific weekend.

Thank you very much. We appreciate everyone being with us and we look forward to a good year. Have a great day.

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