Mohawk Industries, Inc. (MHK) Q3 2014 Earnings Report, Transcript and Summary

Good morning. My name is Rob, and I will be your conference operator today. At this time, I would like to welcome everyone to the Mohawk Industries Third Quarter 2014 Earnings Conference Call. [Operator Instructions] As a reminder, ladies and gentlemen, this conference is being recorded today, Friday, October 31, 2014. Thank you. I would now like to introduce Mr. Frank Boykin, Chief Financial Officer. You may begin your conference.

Thank you. Good morning, everyone, and welcome to the Mohawk Industries' quarterly investor conference call. Today, we'll update you on the company's progress during the third quarter of 2014 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 a discussion of non-GAAP numbers. You can refer to our Form 8-K and press release in the Investor Information section of our website for a reconciliation of any GAAP to non-GAAP amounts. I'll now turn the call over to Jeff Lorberbaum, Mohawk's Chairman and Chief Executive Officer.

Thank you, Frank. During the third quarter, our earnings per share were $2.06, as reported, or $2.44 excluding unusual charges, an increase of 21% over adjusted second quarter 2013 results. This represents the highest quarterly non-GAAP earnings per share in Mohawk's history. During the period, we significantly increased our adjusted operating income by 12% compared to last year through productivity enhancements, cost-containment and acquisition synergies. Ongoing initiatives to control expenses and increase our productivity yielded our highest operating margins in 8 years. Third quarter sales increased about 2% over the prior year, both as reported and with a constant exchange rate. We delivered good results this period, even in an environment with sluggish demand, due to our market diversification and strong execution. As 2014 began, most forecasts were anticipating strong increases in both the U.S. housing starts and remodeling. The projected rise in both new home construction and existing home sales has fallen short of expectations, along with remodeling not growing at the anticipated rate. A bright spot for 2014 has been the increased home values, which has strengthened future remodeling demand. The commercial sector was more positive with forecast of almost 4% year-over-year increase in commercial spending. While the U.S. represents about 70% of sales, other markets have also been soft. At the beginning of '14, we expected Europe to improve from its bottom. However, the economy in the Eurozone now appears to be weakening. Likewise, the Russian economy is softening more than expected and the housing and flooring sectors are feeling the impact. Despite these economic conditions, we continue to execute well, driving the productivity of our existing businesses and enhancing the performance of our acquisitions by improving all facets of our operations. Moving forward, we are focused on product innovation, operational excellence and sales execution. We will continue investing in our business to support our future growth and profitability. The $550 million in capital investments we will make this year are increasing our productivity, allowing us to further differentiate our products and improving our margins. We will continue to execute our business strategy to deliver results. As we look at our third quarter performance by segment, our carpet business's adjusted operating income rose approximately 20% over the prior year, and the margin was up 170 basis points as a result of increased productivity, improved quality and cost reductions. Net sales were softer than anticipated, up about 1% with commercial outperforming residential. During the period, we reduced SG&A costs through more effective sampling, reduced selling costs and restructuring of administrative functions that yielded greater efficiencies and improved our customer service. Our investments in new manufacturing technology increased productivity, reduced waste and improved quality, contributing to the profitability of the business. During the period, residential remodeling was softer than expected, with sales in new construction and multifamily sectors increasing. We increased our participation in the more value-oriented polyester category and our proprietary Continuum process has allowed us to grow by offering a superior post-recycled -- post-consumer recycled product that delivers outstanding stain and perform soil resistance as well as greater softness. In the fourth quarter, we are introducing the next generation of our unique SmartStrand collection with new features and benefits to create additional value. The expansion of our Karastan distribution continues to increase our luxury carpet sales, as we provide scalable merchandising for different markets and retailers. The price increase we announced on certain products in April was fully executed at the beginning of the quarter, which helped to offset increased raw material prices and freight costs. We are pleased with the growth in our commercial category as we have executed our new product strategy to improve the value and styling of our products, featuring our exclusive DuraColor fiber systems. At the same time, we've reduced the complexity of our manufacturing through more disciplined material strategies. We're also improving our flexibility, service and cost structure as well as enhancing our margins while providing greater value to our customers. Our position in modular tile continues to grow and is enhanced by our introduction of new 12x36-inch plank carpet tiles that can be utilized in conjunction with all our other standard sized products to create stylish new designs for public spaces. Our hospitality business remains strong with new commitments from major hotel chains. We're excited about our future growth prospects in the commercial market. Our Mohawk Brand hard surface sales are growing due to the expanded use of engineered wood, LVT and ceramic and the stronger new construction of multifamily markets. We have implemented more streamlined operations over the past few years, which is resulting in greater productivity, lower costs and improved quality in this segment. We anticipate continued operational improvements from our fiber, yarn and carpet plant investments and realignments. About 85% of our new Continuum capacity is now operational and performing as anticipated. To offset escalating transportation costs, we implemented freight increases in July. We continue to improve our logistics systems. And our customers are responding by shipping more on our trucks and increasing our volume per shipment. During the period, our ceramic segment's adjusted operating profits grew 16%, as reported, or 17.5% on a constant basis -- exchange basis, due to increased productivity, better quality and improved pricing and mix. Net sales rose 2%, as reported, or 3% on a constant basis compared to the prior year. Our ceramic performance improved significantly with slower growth in most of our markets. In the U.S., ceramic continues to outperform most other flooring products with commercial growing more than residential. During the period, sales in our service centers grew stronger. We increased participation in our Statement ceramic showroom program and improved large builder and multifamily partnerships. We're on track to open 16 consolidated Marazzi and American Olean service centers in areas where we lack strong, independent distribution. These service centers provide a comprehensive portfolio of products, with the Marazzi brand focused on the mid- to high-end residential sector and American Olean brand focused on the more value residential and commercial products. The integration of Marazzi into our U.S. ceramic operations is substantially complete and we continue to work towards realigning our manufacturing assets to reduce changeovers and increase flexibility. Site work has begun for our new ceramic plant in Tennessee, which will be capable of making higher-value technical porcelain products that we have historically imported. We're expanding our capabilities to manufacture larger sizes and have recently started up a new production line in Texas to meet increasing demand. We continue to introduce rectangles and planks in flooring as well as larger 12x24 wall tiles. To recoup higher freight and raw material costs, we've announced a price increase to be implemented in January on all our ceramic products. We continue to expand dramatically our participation in the Mexican ceramic market as we increase the distributors and retailers supporting our brands. We now offer a complete product assortment from value red body tile to premium porcelain with larger sizes in planks, floor and wall tile collections and market-leading designs influenced by our U.S. and Italian operations. Our new introduction should allow us to further improve our product mix and increase our average selling price and margins in Mexico. During the period, our sales improved in Russia on a local basis and our ceramic market we estimate to be down in the high single digits. Our earnings during the period improved more than our sales as we upgraded our product mix. While our actions in design, value and service are helping us gain share, we anticipate margin pressures as the ceramic category slows within the market. We're expanding our distribution in new construction in the DIY channel to offset the slowing remodeling business. We have a strong Russian management team that is enhancing our sales execution, improving our distribution process and upgrading our manufacturing operations. The ceramic market in Europe remains difficult with limited credit availability impacting demand. We continue improving our margins by reducing our cost structure and improving our mix. Our sales were off slightly as we balanced discontinuing low-margin products and replacing them with higher value ones. We are presently introducing 500 new SKUs to further upgrade our European ceramic collections, while reducing our total SKU offering by about 20% since we have owned Marazzi. Roughly 35% of our sales are now from products introduced since we completed the acquisition. As part of our turnaround strategy, we're in the process of replacing over 50% of our Italian manufacturing assets, to be completed by the end of 2015. One production line is already running and a second will be operational by the end of the year. Since the acquisitions, through better planning and manufacturing strategies, we have significantly improved inventory turns by more than 25% in our Europe ceramic operations. During the period, net sales for laminate and wood segment increased over the prior year on a constant exchange rate and as reported by 3%. Adjusted operating margins for the segment was 11.6% due to lower sales in laminate, higher costs in new products and equipment startups, offset by acquisition and productivity improvement. In the U.S., laminate primarily sells through residential remodeling, which has been the weakest of all the flooring categories. In Europe, flooring sales remain weak and have been impacted by both volume and mix of our products. In the fourth quarter, we anticipate improvement in the operating margin compared to the prior year, while we continue to invest in LVT and absorb the impact of foreign exchange. In the U.S., laminate sales were softer than expected due to both the weakness in remodeling and inventory adjustments that pushed some orders into the fourth quarter. Our Pergo brand is gaining further traction in the home center channel with the introduction of new style and design, providing greater value to the consumer. Our wood flooring sales grew during the period due to the strength in new residential construction, however, market pricing did not keep up with material changes. Across our U.S. laminate and wood manufacturing, we are aggressively pursuing productivity improvement and cost reduction. During the quarter, we incurred start-up costs for a new board product and a new production process in engineered wood, both of which should be behind us. In Europe, flooring sales were softer than we expected. We have executed almost a complete revision of our Pergo product line to upgrade the styling and performance in the marketplace. Our new deeply embossed Quick-Step laminate collection is being well received due to its differentiated appearance and distinctive texture. The timing of marketing and merchandising investments related to these launches increased the segment's SG&A this quarter. During the period, we absorbed start-up costs related to our Belgian LVT plant and equipment upgrades at our recently acquired Czech wood plant. Our increased participation in the rapidly growing LVT category and the expansion of our wood flooring sales should strengthen our future results. Our European insulation business continued to grow with operational and formula improvements offsetting pricing pressures. Our sales and margins on roof panels declined due to unfavorable market conditions, and we closed a small roof panel facility during the period. Our European board business delivered top line growth due to our broad product offering and increased margins from productivity improvement and higher material yields. The synergies associated with the Spano acquisition are yielding operational and administrative efficiencies ahead of schedule. I'll now turn the call over to Frank to review our financial performance for the period.

Thank you, Jeff. Net sales in the quarter were $1,991,000,000, up 2%, both as reported and on a constant exchange rate basis. We had growth in all segments, with stronger performance in the ceramic and laminate segments. For the third quarter year-to-date, pro forma sales grew 2% or 1% on a constant exchange rate basis. Gross margin, as reported, was 28%. Excluding restructuring, it was 28.3%, up 60 basis points over the comparable amount last year. We had higher productivity and acquisition synergies that drove improvement. SG&A, as reported, was $343 million. Excluding restructuring, SG&A as a percent to net sales was 16.4%, a 50 basis point improvement over last year. We were able to keep our SG&A dollars flat, while leveraging the lower SG&A dollars -- percent. Unusual charges for the quarter were $41 million, with most from plant closures, acquisition restructuring and bond redemption premium that we paid for the purchase of $200 million of our 2016 bonds. The operating margin excluding charges was 11.9%. That's up 110 basis points from last year. The declining ruble impacted our operating income dollars by $2.5 million in the quarter. Given our present earnings mix, we gain or lose about $1 million of operating income per quarter if the dollar-euro exchange rate changes 0.02 or if the ruble-dollar exchange rate changes 2.5. We have approximately 70% of our laminate and wood business that's euro-based and 30% of our ceramic segment that's euro/ruble-based. Our interest expense for the quarter was $35 million and includes a $17 million bond redemption premium, which reduces second half interest by approximately $4 million, and we were able to realize some cash savings as a result of the redemption. We may purchase additional small lots of the 2016 bonds if pricing is favorable. Interest improved $8 million, excluding the premium, primarily due to the ratings upgrade and our entry into the commercial paper program. Our income tax rate was 19% for the quarter, which compares to 21% last year. We expect our full year rate to be 21% this year and range from 22% to 23% next year. The rate will fluctuate between quarters, due to shifts of income between countries and timing of deductions. Earnings per share excluding charges was $2.44. That's up 21% from last year and, as Jeff mentioned, is the highest earnings per share in our history. If we move to the segments. In the carpet segment, sales were $779 million, up 1% over last year, with sales growth primarily from volume increases in both commercial and in our hard surface products. Our operating income was $84 million, with a 10.8% margin, up 170 basis points from last year. Continuing productivity and volume increases supported higher margins. In the ceramic segment, sales were $780 million, up 2%, as reported, or 3% on a constant exchange rate basis. We had good growth in our ceramic North American business, with the largest improvement in Mexico. Our Russian business grew in local currency, with the European business down slightly. Our operating income was $106 million, with a 13.5% margin, up 160 basis points from volume, productivity and mix. All regions reported margin increases during the quarter. In the laminate and wood segment, sales ended at $463 million, up 3% on both a constant reported -- constant exchange rate basis as well as reported. We had Europe showing an increase in most categories and U.S. declining slightly from slower remodel laminate business. The operating income in this segment was $54 million with an 11.6% margin, down 130 basis points due to mix and start-up costs. In the corporate and eliminations segment, we had an operating loss of $6 million, and we estimate the full year loss to be about $30 million. Jumping to the balance sheet. Receivables ended the quarter at $1.2 billion, with DSOs at 53 days for the quarter. Inventories were $1.640 billion, with inventory days at 113, up due to inflation, backwards integration and prebuy of raw materials. Fixed assets were $2,773,000,000 and included capital expenditures during the quarter of $142 million and D&A of $85 million. We estimate CapEx for the full year to be $550 million, primarily for capacity expansion and as we assimilate our acquisitions. Total D&A for the quarter is -- or for the year is estimated to be $350 million. And then finally, long-term debt -- net debt ended the quarter at $2,284,000,000. Our leverage ended at 2.0x debt-to-EBITDA. With that, I'll turn it back over to Jeff.

Thank you, Frank. We anticipate that the growth in the U.S. economy in the flooring category will remain unchanged during the fourth quarter, with residential remaining slow as commercial grows. We do not foresee significant improvement in the European economy or flooring industry during the period. In Russia, we expect the economy to continue slowing, creating pressure on our results. For the total company, we expect improvement in our sales and operating margins compared to last year. However, due to the strengthening dollar, we anticipate that foreign currency translation will reduce sales and profits as reported. Our performance will benefit from new products, productivity improvements, synergies from our acquisitions and cost containment initiatives. We remain confident in our ability to execute our business strategy within the prevailing economic conditions. With these factors, our guidance for the fourth quarter earnings is $2.18 to $2.27 per share, excluding any restructuring charges. Looking forward to 2015, we anticipate improved growth in the U.S. economy, with housing starts, existing home sales and remodeling strengthening from this year. The European economy appears to be getting weaker, but the Central Bank is keeping interest rates low to stimulate growth. The Russian economy is declining, and we are taking actions to increase our market share, which will impact our margins. We expect improved sales growth on a local basis and continued improvement in our margins. From the beginning of 2014, the stronger dollar has reduced the dollar-euro exchange rate by 7% and the dollar-ruble exchange rate has decreased by 31%. Our reported results will be lower if the U.S. dollar remains strong. Our plans for 2015 are centered on improving our results and we'll continue to pursue acquisitions that provide good long-term returns. We'll now be glad to take your questions.

[Operator Instructions] Your first question comes from the line of David MacGregor from Longbow Research.

Great execution in a tough top line environment. I guess, my question really deals with some of the longer-term margin targets that you've communicated historically. I think you've talked about 10% as being kind of the longer-term target margin in carpet and 13% in ceramics. And I guess, the question really is are we seeing margins here? Or are you beginning to think differently about margin potential?

Make sure you remember that the business is seasonal and we're in one of the best quarters each year, so you have to look at the annual rates. We believe we'll continue to improve our margins from the annual rate we expect to be at.

We're not changing the earnings -- or the margin targets that we've talked about in -- long-term margin targets we've talked about in the past, David.

Great. So we're getting closer to those numbers. Now, I realize there's seasonality in the numbers, but it would appear that we're getting -- we're converging on those numbers pretty quickly. Follow-up question is just with regard to Russia, and you called out a couple of times in the presentation that you're investing there, that the macro situation there is deteriorating pretty quickly, margins are likely to come in. Is there any way to help us in terms of sizing that business today within the context of ceramics and the extent to which you feel margins might come down?

When we bought the Marazzi Company, it was about $1 billion in sales and I think we said then it was represented, in total, $1 billion around the world. And we said Russia represented about 25% of that, and so the business has grown over the last couple of years.

And then the margins to compression that you expect from these various dynamics?

Well, they'll go down, but we're not ready to quantify it.

Your next question comes from the line of Robert Wetenhall from RBC.

This is actually Desi filling in for Bob. You discussed the price increases for the carpet segment that you realized in April in order to offset raw material costs. Given the recent decline in oil prices, are you seeing any raw material relief on the petroleum-based inputs for the segment as we've gone to the fourth quarter?

We have not seen any basic changes in our raw material costs. The raw material cost that we've said do follow oil over the long term, but in the short term, the chemicals and resins aren't always aligned, so we haven't seen any yet. If they stay down continuously for a long time, we would expect to see so.

Okay. And then you guys are obviously investing heavily in the business to realize improved margin performance and expand your product offering. And then as we think about CapEx requirements for the business going forward, do you expect to remain in that $550 million area for 2015? Or should they trend lower over time as the spending related to the integration of the acquisitions are completed?

We, at this point, don't expect to spend the same number next year that we're spending this year. We don't have a final budget yet, but we're not looking at spending the same number this -- next year as we are this year.

Your next question comes from the line of Stephen East from ISI Group.

Jeff, if you look at the -- you made some comments about the U.S. remodel/repair market. How much do you think it's down? And are you starting to see pricing pressure come through on your categories? And I guess, which categories are you seeing the weakest type performance?

The remodeling business has not improved as we had expected. I can't say that we have a definitive reason why it is for the different pieces. We believe that the mortgage problems that people are having, getting mortgages, are impacting existing home sales. Some new buyers coming in the marketplace with the debts they have, these young people are impacting it. So we think that it's going to improve, they just haven't come back as fast as we have thought as they go through. With that, the marketplaces are less robust than everyone had expected and there are various promotions and things in the various categories as people try to balance sales with their asset levels.

And it's hard for us to quantify the difference between new construction and remodel because there's overlap between customers and products and things like that, so to give a number would just be a guess on our part, Stephen.

Sure. Okay. Fair enough. And then, Jeff, if you -- when your CapEx gets big, I look at it as 4%, 5%, 6% of sales, I really think of that in the same vein as I look at acquisitions. And you did -- between last year and this year, you're pushing what, $900 million or so, so a decent-sized acquisition, if you will. Can you help us understand, with acquisitions, it's fairly easy to see what's going on from a margin perspective and whether you're getting top line. We can't really see that with CapEx. Can you help us a little bit with what do you think we've seen so far out of the last 2 years' worth of spend? And what do you think is still on to come? I know we've got the LVT plant that is going to make a big difference, but maybe some of the other moving parts to it.

If you look at the overall CapEx, we have about $70 million to $90 million in maintenance, safety, environmental things each year, depending upon what it is and basically those are just keeping the business running. We internally have a rigorous process for deciding what to do. When we look at it, most of the cost reduction projects typically have between 2- and 5-year paybacks. When we look at investments that are going to expand the sales, they tend to be a little longer, could be 4 to 6 years, because the start-up time in getting them go through could be less. If you look at what we spent in 2014, the big pieces are around replacement of high-cost assets and our acquisitions that we knew when we went in that we would have to do things to get their margins up. There where businesses like the Pergo business, which had very low margins; the European ceramic business, which had no profits that we knew we were going to invest in; we've announced and we started the spending towards putting in a new porcelain plant that makes technical porcelain in the U.S. and Tennessee; we're in the process of putting up a new LVT plant in Europe; we've expanded the production capacity of ceramic planks and larger sizes in the U.S.; we have fiber and yarn investments in the carpet business that support the changing product trends, it happens about once every 20 years, we have to replace huge parts of the assets; and then we have numerous smaller projects across the businesses each year.

Okay. If you sort of broke it out between your spend to drive volume versus your spend to improve your margin, how would you, sort of, allocate that bucket?

We have it, but I don't have it in front of me. But each project, each division, each piece and I can't -- I don't have it to give you anything. It's made up of those pieces that we talked about.

Just to, Stephen, reemphasize Jeff's point on going through a rigorous process, we do. We get down into a lot of the details at the division level and then here as well, when we have capital projects that are brought up.

Listen, the reasons the margins are improving are all these things we've been doing.

Your next question comes from the line of Michael Dahl from Credit Suisse. Michael Dahl - Crédit Suisse AG, Research Division: I was wondering if we go back to the margin improvement and look specifically at the carpet and ceramic side, clearly a very good job in a tough top line environment. But if I look at the profit improvement, so $1 growth in profits in excess of $1 growth in sales. So even if you're executing on these kind of productivity improvements, that seems like it's probably unsustainable. I think margin -- guidance for fourth quarter, it's just -- we'll still see that in the fourth quarter. But just how to think about the next couple of quarters on the incremental side for those 2 segments?

So what you're seeing is years of work we've been doing to get ready for this, including the capital investments we just talked about, about the businesses. If you look in the carpet business, we've closed a significant number of facilities; we've consolidated different parts of the business; we've replaced higher costal assets; we simplified the product line and the raw material structures; we've consolidated and reduced the administrative costs multiple times in the last year or 2. We've invested in new systems to improve the efficiency of the business and we've spent a lot of effort trying to increase our product differentiation, which helps our margins in that. So I mean, all those things coming together have had a significant impact on the way we operate the business. Michael Dahl - Crédit Suisse AG, Research Division: Got it. Okay. My second question. On the lower laminate sales in the U.S., I'd imagine it's maybe hard from quarter-to-quarter to get a great read on this, but what's your confidence level on -- that this is truly just a weak R&R environment versus things like LVT actually eating into market share for laminate in the U.S.? Any color you have on that?

I mean, our Ouija board probably doesn't work a lot better than anybody else's. We believe that the laminate business will grow but at a slower overall rate than the overall flooring category because of the competition it has with other things. Also, there's some pressure on the higher-end products with ceramic and other alternatives going after it. Our business is focused more on the middle- to higher-end of the marketplace, where there's more differentiated product which helps us. But in our plans, it will grow slower than the overall market.

And then one other point to make on laminate is it's -- the end market there is much more limited, it's primarily residential remodel and very little going into new construction and commercial. So that is a headwind compared to the other categories.

Your next question comes from the line of Michael Rehaut from JPMorgan. Michael Jason Rehaut - JP Morgan Chase & Co, Research Division: It's Mike Rehaut. First question I had was on the -- going just back to the carpet margin question that was asked earlier. I mean, looking at it another way, in over the last 3 years, you're on track to do kind of at least a mid-8s type of margin this year, you're basically talking about 400 basis points of margin improvement on flattish sales. And so with incremental margins, I believe you've talked about around 20%. I think the math would just dictate that if you're going to get some amount of sales growth over the next 2, 3 years at least that, that 10% margin could be easily surpassed. So I just wanted to know if there's anything that we're missing there in terms of -- I mean, obviously, you can have some short-term disruptions from a cost versus price, but you've been able, in a lot of instances, to achieve price increases when needed, cost-based, that is. So I'm just trying to understand if there's anything that we're kind of missing in terms of what would keep a lid on carpet margins from not exceeding that 10% mark?

It's definitely our goal to do that. We expect continued benefit from our investments. We expect to continue improving the productivity and new products. We're anticipating, next year, to have continued improvements, but probably a little less as a percentage basis than we did this year. And our goal is to keep driving it up to new heights. Michael Jason Rehaut - JP Morgan Chase & Co, Research Division: Okay. I appreciate that. I know it's hard to give out a target when it's kind of almost been new territory. Second question, just on -- you highlighted some, kind of, more temporary costs in the laminate and wood segment for the quarter. Just trying to get a sense of the order of magnitude, where you had the overall margin down about 130 bps year-over-year, what those kind of more temporary third quarter costs that you don't expect to recur? What was the impact of that on the year-over-year decline?

I'll try to give you a view of the pieces, but the specific numbers, we're not giving out. We had weaker sales in both the U.S. and Europe, which impacted the business; we had higher costs due to new product introductions; we had equipment startups that I went through, which we think are behind us, so those were onetime pieces; in Europe, we're absorbing the cost of investing in LVT; we have the new Czech plant that we bought from someone; we're having to upgrade it and get it where it can make more money; in the U.S., the wood selling prices didn't cover them so the question is where the margins in the selling prices and the cost is going to be in wood, we hope they're going to be better. With all that, we do expect the margins to improve in this segment, both next quarter and next year. Michael Jason Rehaut - JP Morgan Chase & Co, Research Division: One quick last one, if I could. The Marazzi savings that you expected, are you on track? Or do you think you could even exceed some of your original targets or hopes that you had when you closed the acquisition?

The business is doing better than we had expected. The U.S. business we're now operating as a single business and is working well together. We think we have opportunities to market the 2 brands together, which we've been talking about. The Russian business is operating really well. The market conditions have changed from where we saw it. But when we bought the business, the Russian economy was growing about 5%. And most likely, it's going to be in a recession. And then same thing as here, when you're in recession, our category tends to get hurt worse. As some of the things helping us there are that probably about 25% of the ceramic market was being imported from around the world. So the weak euro is slowing it down and then we believe we're in the best position in the marketplace from a styling standpoint, from a product and a design standpoint and from the franchised stores that are lined with us. However, the remodeling part of the business is being impacted the most at the moment. So we're having to move from that to expanding our position in the new construction business and the DIY channels, which we're doing. But we're expecting the overall marketplace, the pricing pressures to increase, but we're going to increase our market share. And then the final piece of the business is the European business, which was basically earning no money, we have it profitable at this point and growing a profit. And when we get through putting in the new equipment, we'll have a lower cost base and a higher product mix when we get through. And we'll have to decide -- we have in place what we expect to do next year, and -- I mean, it's moving and actually being executed as we speak. And there's possibility for more actions after that once we get it executed. So I think we're doing really well from where we started and some things are in our control and some things aren't.

Your next question comes from the line of Dennis McGill from Zelman & Associates. Dennis McGill - Zelman & Associates, LLC: Frank, I was just wondering, on -- in 2014, if you were to aggregate, sort of, cash flow over spent on restructuring actions in any of the integration, if you could give us a rough sense of what that number was or will be? And then as you look forward to next year, maybe what the change might be, considering any other restructurings you might have planned?

I don't have it broken down between cash and noncash in front of me, but I can get that for you later, Dennis. I guess, we've incurred about -- in restructuring, about $47 million for 3 quarters, and we could get another range, say, of $23 million to $27 million in the fourth quarter, but timing in terms of decisions that we make and when we execute things may impact that. And then next year, it could range -- and this is all related to the acquisitions. It's really related to Spano and the Marazzi -- Europe Marazzi acquisition. Next year, it could range $40 million to $45 million. And I can get you the cash portion of that later. I don't have it here in front of me. Dennis McGill - Zelman & Associates, LLC: Okay, that would be great. And then separate question. As you look across the portfolio, and specifically wood, I know it's not a big business for you. But if you look at the price per foot of wood with the inflation that's been driven by raw materials, what type of GAAP is that versus, let's say, ceramic as an example? And how would that compare versus history?

Are you talking about the cost difference or the selling price difference? Dennis McGill - Zelman & Associates, LLC: Selling price to the consumer.

The selling prices of ceramic have had limited inflation, with most of it being caused by the freight movement. Ceramic is very, very expensive to move around the country, but I mean, it's gone up limited amounts. And then the wood prices have gone up substantially as the raw material prices have gone up. So that wood is much more expensive relative to ceramic than it was 2 years ago or 3 years ago. Dennis McGill - Zelman & Associates, LLC: So does that limit the industry's ability to recover raw material cost inflation on the wood side?

That's impacting it as well as the capacities in the marketplace doing it as well.

Your next question comes from the line of John Baugh from Stifel. John A. Baugh - Stifel, Nicolaus & Company, Incorporated, Research Division: I was wondering, if you go back to ceramics, Jeff, and I know you're not going to give a '15 guidance, but there's a lot of moving parts. Obviously, the revenue outlook for Russia and Western Europe is pretty challenged. But I'm just curious, as we think about dollars of EBIT maybe next year in ceramic going up versus flat or negative, do we get enough boost out of the U.S. growth and margin improvement at Marazzi and Europe that we can still look at a pretty good growth next year in ceramics?

I mean, we're expecting to have the top line grow and we're expecting to have the margins go up also as a collective piece, but we're going to lose a part of it relative to the FX. Now I don't know whether the FX is going to get better or worse from here forward. I'm not too good at guessing, but we're expecting both of them to grow and offset it, but it's going to inhibit some of the growth we thought we were going to have.

And a lot of the changes we're making, John, in ceramic Europe, we're upgrading assets and consolidating plants, et cetera. That's improving our costs and taking our mix up. So that will drive margins and top line a little bit, too, with the mix increase.

So on a local basis, we expect the European business to be more profitable and we'll probably give up a little taking share in Russia. John A. Baugh - Stifel, Nicolaus & Company, Incorporated, Research Division: Okay. And then quickly on carpet. Did you benefit at, all from, from rug sales being up materially year-over-year? And do you think your volume of residential carpet share was similar to the trade? And was that negative?

I think in the period that we probably did a little bit better than the carpet industry. We are anticipating our rug business doing better going forward. We've made changes in it to improve our product offering. We're using more of our fiber and assets to bake more differentiated products and we've had some changes in the competition in the marketplace.

Your next question comes from the line of Keith Hughes from SunTrust.

You made some comments on commercial being up and strong, in the intro. I guess my question is can you differentiate between carpet and ceramic and trends you're seeing there?

I think the trends are similar. They have different -- they participate in different channels at different amounts. And then in my carpet segment, we've gone through about 1.5 years or 2 years of transition of moving the product line, the raw material structures, taking complexity out of the business. And those things are giving our business a boost as we are getting to the other side of all those things.

Do you think you're taking market share in carpet in the recent results?

Maybe a little.

Your next question comes from the line of David Goldberg from UBS.

It's actually Susan for David. In terms of the promotion, are you seeing any big changes there? And also, have you noticed any changes to the effectiveness that they're having on the consumer?

I doubt that they're changing the consumer much. Typically, promotions in the industry are run as the supply and demand of individual companies move around and people try to equalize their assets with the demand structures of each one. So I don't think that the promotions really change the consumer demand.

Okay. And then on the R&R side, it seems like earlier in the year, it wasn't just getting better but it also seemed like people were maybe ever so slightly moving up to sort of higher-end products as well. And now based on your comments, it seems like that has really slowed dramatically in the second half. What are you hearing from your customers that's really driving this? And to what degree do you think people have stopped purchasing as opposed to perhaps moving down or shifting to different product types?

I think, today, the markets are more bifurcated at the top and the bottom. The middle is what's getting hurt the most. The middle buyers are tending to move down or postpone it as much. Some of it may come from -- over the past few years, you had companies investing in homes that they weren't living in them and renting them out. They tend to go with lower-value products than others. People, I think, are concerned about -- in the early 2000s the price of a home was moving up so much that if someone put an investment in their home, they expected to get multiples of it back when they sold it. So having the housing prices move up where people get more comfortable that they invest -- the money they're putting in are investments would help the business more. We think it's going to improve over the future. We think that people want to live in nice places. We think that the mortgage rates are going to get a little easier, the conditions to get them from what the government is talking about. So we're optimistic about the future. But it is what it is today.

Your next question comes from the line of Kathryn Thompson from Thompson Research Group.

As we've discussed in past calls, there's a bit of capacity coming online at the lower end of the carpet market and a capacity that will continue to come online as we go into next year. What, in your assessment, does this do to pricing? And not necessarily the next couple quarters, but how do you position yourself and how do you think about pricing in that end of the market over the next 12 to 24 months?

The capacities coming in was based on expectations of a higher growth rate that we've seen so far as well as the change in the product mix of what people are buying. So some portion of what's coming in is replacing other raw materials and obsoleting other assets that the industry have, such as in olefins, which is declining, so there's many assets that are going to be shut down or not used. With that, there is more capacity in the marketplace and it tends to -- people tend to use the open price point categories to balance out the asset utilizations from time to time, to get them going. And the bottom end of the market is always competitive and we expect it to continue to be.

Okay. And then just a follow-up on the laminate wood, I appreciate your comments today on that. But as you -- one of your peers has seen similar-type margin or pricing pressure. And I guess the question would be is the pricing situation improving? Or is it unchanged? Or are you somehow better able to perform and pick up share even though the market is less than ideal?

First, our share to our total business is relatively small. And second, I want to make sure you understand, our U.S. wood business is not the same as our non-U.S. wood businesses.

Right. I was referring to the domestic.

The domestic business, in addition, you have a solid wood business and an engineered wood business and the dynamics are different because of the raw material content of each. But the recent past being we, as an industry, tried to raise prices and did not get as much as we wanted. I don't see anything that's changed that from 2 weeks ago to now.

Your next question comes from the line of Sam Darkatsh from Raymond James. Sam Darkatsh - Raymond James & Associates, Inc., Research Division: I've got just a couple questions left, all of them have to do with oil sensitivity. We're looking, obviously, at volumes in the carpet industry that are really muted. Do you need to see growth in industry volumes in order to maintain price? Should raw materials drop via lower oil prices? Or do you think the industry is disciplined to the point where the low oil prices could translate through at current volumes without excessive discounting?

In my long history, the pricings have gone up and down based on raw materials. As the prices go up, we chase it a little, and as the prices go down, we keep it awhile but it tends to end up being passed through over time. The commodity areas of the business tend to have little differentiation, and I would assume that if the prices fall, there would be some positive impact for a while. But with the capacity utilizations, we will probably pass it through. But historically, it's always moved down there anyway so I don't know if it's really capacity related today or it's just the way we operate. We don't want to earn too much money. Sam Darkatsh - Raymond James & Associates, Inc., Research Division: And where would you see -- assuming the oil prices stay down here, where would you see lower oil prices manifest itself first within your various raw materials? My guess would be in the backing, since the backing prices have risen this year, more so than perhaps others. But where might you see it first, Jeff, canary in the coal mine-type stuff.

I can't give you a simple answer I don't repeat. We have each of the different raw materials that we use: polypropylene, polyester, nylon that all have different chemical dynamics in them. So the chemical changes in each industry and what the alternatives for the chemical part of it determines what the prices are with supply and demand. You then have that resin pieces, which you have supply and demand in, which go into various industries beside ours. And the competition of all there, you can have, as we've said before, you can have falling oil prices and rising raw material for us or you can have reverse. So it just has to work its way through based on the world dynamics, too, because the chemicals get shipped around the world and the U.S. dollar strengthened and that's going to impact it. So I mean my predictions of where it's going to go aren't too good, and I have never found a formula that I can convert one to the other. Sam Darkatsh - Raymond James & Associates, Inc., Research Division: Last question, if I might. Frank, total transportation costs for the company, I'm aware that there -- it's not all oil-based, obviously, there's going to be labor costs that inflate on you and other ancillary costs that have nothing to do with the price of diesel. But generally speaking, your entire transportation exposure from a cost standpoint is what, ballpark?

I don't think we have the numbers with us, but most of the product categories, the freight is an add-on cost or we add -- we change the price of the products. So we're trying to move the selling prices to take care of them as either freight or the other. We've said before that we raised the freight prices in the second quarter. We just announced that we're going to raise ceramic prices that are sold on a local basis in the first quarter. So I think that we have reasonable ways of managing to pass-through of those costs. They're not exactly lined up but they tend to be pretty close today. Sam Darkatsh - Raymond James & Associates, Inc., Research Division: Are they separate from the selling prices of the product, the freight costs?

It depends on the product and the market and the channel. In ceramic, we have a portion with our service centers that we sell it FOB to local destinations for instance. In our carpet, we tend to sell them with a freight charge added on to it. In other pieces, we have a freight charge embedded to get it to local and then an additional freight charge to get it local -- the long haul embedded in the local freight as an additional charge and all variations thereof.

I just want to follow up on one question that Dennis had asked earlier about cash versus noncash restructuring this year. As a percentage, cash is probably about 2/3 of the total. Next question.

Your next question comes from the line of Eli Hackel from Goldman Sachs.

Can you just talk about maybe what the slower-than-expected growth could do to potentially catalyze additional consolidation in the foreign sector globally? As you think about M&A for your company, are there any specific areas of focus that you're looking at? Obviously, you did deals in Europe and some was a Russian focus more recently. Are you looking towards moving to other areas or more to the U.S. with potentially stronger growth in this country, maybe in the more medium term?

We see the world as an opportunity for us to do acquisitions. We try to find acquisitions that we can leverage our knowledge and/or leverage our style, design processes in. We go into new marketplaces. We think those things we're capable and we have shown that we can apply those across new places and help people improve the way they go to market. We don't have a specific area that we say we have to be in this one or another one. We look for opportunities in 2 places. One is either to buy businesses that we can improve substantially or buy businesses with really good management and good results that we can take and leverage across other areas and geographies and we operate for both. I can't say that we have one geography that we want to go in. We look for geographies that we think we have advantages in or that will give us a foothold to expand upon. Around the world, there are companies that are owned by private equity, which they're looking to turnover. There are some areas where their businesses, like we bought Pergo, or other ones that their -- the operations of the business aren't what they want and they need capital. And again, I can't say there's one product or geography that's more interesting to us than another.

Great. And then just quickly. Can you just update us on your LVT plant in Europe and any potential plans to do LVT or build an LVT plant in the U.S.?

Our LVT plant in Europe is in the final stages of being constructed. We are running tests on the product design and specifications as we speak. We have a lot of product design and things going on in the background. It is a new technology. It is different than other technologies that have been tried. It's -- we're going to be conservative in making sure that we test it properly before we bring it to market. I think we're in a good position. It's the second plant in the world, I believe, that's automated and running at high potentials. We have the ability to make products in the high end of the market as well as in the low end of the marketplace. We think it's a good place to start. We'd like to get the learning curve through it and then we would be prepared to open up other plants in other geographies as we thought we're -- give us good returns.

Your next question comes from the line of Mike Wood from Macquarie.

Last quarter, you've commented that SG&A would be up sequentially versus the first half and the back half of the year. And the third quarter run rate is down materially from the first half. Were any of these changes temporary or maybe performance-related that we should expect to come back? Or should we think about these as being more permanent changes to your SG&A? And I'd also find it very helpful if you can just update us on the fixed versus variable part of SG&A.

The SG&A dollars were about flat, maybe slightly down Q3 this year to Q3 last year, excluding restructuring. And they'll probably be flattish in the fourth quarter this year compared to last year. As we move forward, I would anticipate the dollars to go up as we reinvest back into the business and grow the -- to support growth in the business. But the percentage of SG&A, the sales, we'll be able to leverage that and that should continue to improve. And it's about 50% fixed and 50% variable, somewhere around there.

Great. And then also, just to clarify the tax guidance, which seems to be lower. Can I just confirm that the fourth quarter, you're pointing to about an 18% or under an 18%? And is there any -- I'm just wondering if there's anything that you've structurally changed there on the tax side. Or if you can give us just the mix that we should think about for next year to figure out where we come in within your guidance.

Rates should be about 19% for the fourth quarter, and really, the rate is impacted between quarters and in between years, based on regional dispersion of the earnings and also between quarters based on timing of certain deductions. And looking forward, we're estimating at this point that our rate -- tax rate would be in the range of 22% to 23%.

You gave him the quarter, what is the annual tax rate for '14?

Yes. The annual rate for '14 is -- would be around 21%.

And your next question comes from the line of Stephen Kim from Barclays.

Most of my questions have been answered, but I wanted to talk to you a little bit about LVT. We've seen a tremendous amount of capacity opening up in the industry, seems you can't really go for a bike ride in the country without passing a new plant. And I was curious if you could just talk a little bit about how you think about your capacity, which you're bringing online, relative to what you see others doing? What we're -- what I sort of see when I look out there is a category that has gotten everybody very excited. Nobody really -- it's, kind of, like new land, nobody has really staked it out yet. I'm very curious as to how you anticipate the success being achieved in -- for individual players. What's -- what kind of strategies will, in your view, likely be the path to success? Is it going to be distribution? Or is it going to be product innovation? Just if you could talk a little bit about that.

Just to clarify the question, do you want a capacity discussion or a strategy-to-sell discussion?

Well, more of the strategy to establish a strong presence in that category versus others.

Let's start first. Our plant is in -- the one we're building right -- the one that's up -- that's going to be up soon is in Europe. In Europe, there is one other low-cost high-performance plant there, and I'm not aware of another one being announced at the moment. So we think we're in good position there. In the U.S. market, the marketplace is somewhere around $900 million, I believe, in wholesale this year. It's expected to grow at double-digit rates over the next few years. The amount of capacity coming in the industry is somewhere around 40% to 50% of the sales in 2014. The Chinese have been supplying the marketplace, so it depends on the -- what happens with the ability to compete with the Chinese, both on a cost basis and a style and design basis, what's going to happen with the capacity questions. On an individual basis, you're going to have companies that have different strengths. We believe that our business, it is very similar to both our laminate business and somewhat with our ceramic business -- we think that we have advantages in the style and design category to take our knowledge from those businesses and apply it to the new business. In addition, our ability to get to all categories of the market in commercial as well as residential in all the different channels with our sales forces and the relationships we have, we think will allow us to achieve the shares we would like in the industry.

So when you look across LVT, currently, how much of that business do you think -- or the demand do you think is commercial versus resi? In the U.S., I'm talking about. And do you anticipate that the growth will be greater in commercial or resi as you look forward over the next few years in LVT?

I'm guessing, but I believe that the commercial part is probably around 40% of the industry at this point, and we see it growing in both categories.

Okay. Great. And then the second question I had generally is about brand. And I was curious as to whether you believe that brand matter -- has come to matter less in the various flooring products that you've seen and is perhaps other things such as innovation have -- or just flat-out costs have allowed manufacturers to -- or have allowed customers to sort of move away from brand and just sort of seek value in other ways or if you still think brand is still very, very important in the category.

I think that the brand price and style and design and service are all components of the same thing. And what you have is, some competitors that have little differentiation and tend to -- the only thing they tend to sell is price on one extreme. And then you have the ability, which I think we do, to compete on a price basis in one part of the marketplace, to compete on a style and design in another part of the marketplace and to compete on a service level at another part of the marketplace. And so I think that it depends where in the value stream you're playing and which channels or markets you're playing, how much it means to each.

Great. And where do you think you've seen the most change with respect to the design and innovation in terms of that becoming more important? Would you say it's been mostly in the ceramic area or the carpet area?

I mean, I think -- I'll give you examples of all. In carpet, we led the industry with a product called SmartStrand, which has a differentiated position. We led the industry in creating ultra soft carpets, which dramatically changed the premium part of the industry. In ceramic, we've led the industry in using Reveal technology, which is a unique printing technology. Today, about 20% of the industry in ceramic is being sold in wood planks, which didn't exist 3 or 4 years ago. And we have the most options, the most sizes, the most links. For instance, we translate that into other looks as well. In laminate, we have a premium high-end position, which we get because our products are different from others and people are willing to pay more for a Ferrari than they are for a Volkswagen. So, I mean it's everywhere.

There are no other questions at this time. I'll turn the call back over to Jeff Lorberbaum for closing comments.

Thank you for joining us. I think that we had a good quarter. I think that the strategies we're using are enabling us to outperform the marketplace. And I think the investments we're putting in are going to allow us to do better on an ongoing basis. The management of the business is in the strongest position it's ever been at, and I think that our company has significant opportunities for the long-term future. Thank you for joining us. Have a great day.

Ladies and gentlemen, thank you for your participation. This concludes today's conference call, you may now disconnect.