Mohawk Industries, Inc. (MHK) Q2 2018 Earnings Report, Transcript and Summary

Good morning. My name is Crystal, and I will be your conference operator today. At this time, I would like to welcome everyone to the Mohawk Industries First Quarter (sic) [Second Quarter] 2018 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. And after the speakers' remarks, there will be a question-and-answer period. [Operator Instructions] And as a reminder, ladies and gentlemen, this conference is being recorded today, July 26, 2018. Thank you. I would now like to introduce Mr. Frank Boykin. Mr. Boykin, you may begin your conference.

Thank you, Crystal. Good morning, everyone, and welcome to Mohawk Industries second quarterly investor conference call. Today, we'll update you on the company's results for the second quarter of 2018 and provide guidance for the third quarter. I would 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'll now turn the call over to Jeff Lorberbaum, Mohawk's Chairman and Chief Executive Officer. Jeff?

Thank you, Frank. In the second quarter, we generated sales of $2.6 billion, up 5% compared to the prior year. For the period, our adjusted operating income was $343 million, or 13.3% of sales with an adjusted EPS of $3.51. Our second quarter results fell short of our expectations and we are taking actions to improve the performance of our U.S. businesses. With the overall economy, our results were negatively impacted by input inflation, higher transportation costs, a stronger dollar and a tight labor market. We were also affected by changing product mix, timing of price increases, lower production units, startup of new projects and the delayed Godfrey Hirst closing. We are raising prices, expanding and growing channels and participating in new products and geographies. Our businesses outside North America showed significant improvement and our results improved more without startup costs and expired patents. Although the economy in Europe slowed somewhat, the results in most of our non-U.S. businesses improved substantially with LVT, Russian ceramic, wood panels and insulation leading the growth. As the dollar strengthened in the period, the euro fell from $1.24 to $1.16, reducing our translated results in U.S. dollars. Our company and industry are absorbing significant inflation. In the U.S., rising material costs had the greatest impact on our carpet business. This year, we've had two carpet price increases and recently followed with a third increase to offset additional material and freight inflation. We are taking pricing actions in most product categories impacting inflation, including our higher-value ceramic products. The cost increases have come at a faster rate than we are passing through to our customers, which is impacting our results. These price increases occur in every cycle and we are managing our business strategies by product and geography to offset. We've also increased freight charges to mitigate higher transportation from increasing fuel, labor and common carrier costs. We've expanded our fleet of trucks and trailers to improve service to our customers and better control our costs. We have become more active in the value price points and promotions, which is increasing our residential, new construction and commercial sales and reducing our pricing and mix. In addition to pricing actions, we're introducing new product innovations, implementing process improvements to enhance our competitive position and service levels. During the period, our U.S. LVT sales growth was limited by capacity constraints. To expand sales faster this fall, we are ramping up our new manufacturing and have secured more LVT from outside sources as LVT continues gaining market share. In Europe, we are the premier provider of LVT with leading style, brand, value and service. Our new European LVT line is operating as anticipated, producing existing flexible products and new rigid LVT that we are preparing to launch. Our expertise in LVT will establish a similarly strong position in the United States. During the quarter, our new expansion projects had startup expenses of $15 million as we continued investing to broaden our product offering and geographic penetration. The costs for projects that have started up will decline, while expenses for new projects will begin. In LVT, we are commencing production of rigid products on new production lines in both the U.S. and Europe. We're starting up new ceramic capacity in Russia to alleviate constraints and adding capacity to Poland to grow our ceramic presence in the Northern and Central Europe. In the U.S., Europe and Russia, we're initiating new laminate production that provides the next generation of visuals, performance and water resistance. We're constructing a quartz countertop plant in Tennessee to more fully participate in the growing $1.2 billion U.S. quartz countertop market. In Europe, we've started a new carpet tile plant and are establishing a commercial sales force. As the Russian economy improves, we're constructing a sheet vinyl plant to add another flooring category to complement the success that we've had in ceramic and laminate. The Godfrey Hirst acquisition provides a robust platform to create a total flooring presence in Australia/New Zealand just as we have in the United States. These investments will enhance our sales and profitability with most of the impact occurring in 2019 and beyond. Chris Wellborn has laryngitis, and I will review the segments. He will try to answer questions at the end, if his voice is strong enough. For the quarter, our Global Ceramic sales increased about 3% as reported to $929 million. Adjusted operating income for the segment was approximately $140 million or 15.1% of sales. We expect our sales initiatives in the U.S. to expand our customer base in the faster-growing builder and commercial channels in the third quarter. Across the segment, we are leveraging our leading technology and design to deliver larger sizes, creative shapes, unique visuals and performance, enhancing features to generate greater demand. During the period, our North American ceramic volume improved with our average price weakening from growth in lower-value products and channels. To offset inflation, we're implementing increases on higher-value products, energy surcharges and freight. During the period, we increased our relationships with regional and national builders, expanded our statement ceramic boutiques and secured additional commercial projects. To increase our share in the ceramic market, we're delivering innovative products, enhancing our service and increasing participation in homebuilder, home center builder and commercial channels. We're reemphasizing ceramic's timeless beauty, performance and enduring value in our communications and advertising. We continue to invest in product innovation, including new plank sizes, three-dimensional wall tiles and decorative tiles that appear handcrafted. We've improved our administrative efficiency, consolidated regional service centers and piloted mobile platforms to make it easier, more seamless for customers to conduct business with us. To better serve the Florida market, we've opened a new distribution center to provide overnight service and enhance our share. The strength of our manufacturing capabilities, product development, brands and distribution uniquely position us in the marketplace. The countertop growth is accelerating, led by sales of our quartz products. We are leveraging our ceramic relationships with builders, developers and national accounts to expand our business. Construction on our quartz plant in Tennessee is on schedule with equipment installation and product development underway for production to begin the end of this year. Our porcelain countertop program is expanding with the growth of our slabs and custom-size programs. We've opened additional countertop centers to further our growth of the quartz, porcelain and stone slabs. In Mexico, our sales increased as the quarter progressed, outpacing the market, which declined before the national elections. We've doubled the production in our Salamanca plant and introduced larger sizes to the market. We're extending our presence in home centers, increasing our distributor base, capturing more commercial opportunities. We're updating our distributor showrooms by highlighting our differentiated products to expand our presence. Our Central and South American sales are growing steadily with new distributors in a dozen countries. European ceramic sales slowed slightly with the economy and the impact of foreign exchange rates, while our margins increased from improved price and mix and higher productivity. The modernization of our Italian plants has improved our efficiency and design capabilities. We're introducing new collections to enhance our residential mid-price offerings and expanding our porcelain slab options. We've completed 48 branded tile shops within our customers' stores. We're expanding product training and enhancing our commercial specifications. As we expand our Polish factory, we're preparing to realign our product manufacturing between our European plants to optimize our assets and improve our offering. We are progressing with the integration of our Italian and Polish acquisitions as we enhance productivity and consolidate administrative product development, sales strategies. We're introducing higher-value larger sizes in our Bulgarian operations, which is enhancing our mix and increasing sales in adjacent countries. Our Russian ceramic sales and margins remained strong. We are the leader in the market with the strongest product offering and manufacturing assets, supported by a national distribution center and a network of retail stores. To support future growth, we're expanding our porcelain floor and wall tile capacity. Material, energy and transportation inflation has increased in Russia and will impact our income growth in the short term. In the second quarter, Flooring North America segment sales were approximately $1.1 billion, increasing about 2% with an adjusted margin of 10.4%, including startup costs of $5 million. During the period, we began executing our second carpet price increase of 2018 to cover inflation. The realization of our price increases was later and our product mix declined more than we had anticipated. Our raw materials and freight continued to escalate and we announced another price increase to recover. In the second quarter, volumes did not increase as we anticipated and we produced less than we sold to reduce inventory. Our productivity declined as we manufactured new products that had higher production costs. These issues have been addressed, but some costs will flow through to our inventory. Our U.S. LVT sales in the period grew less than we forecast due to a delay in shipments of our sourced products. We anticipate a significant increase in LVT sales as our new U.S. production ramps up and the supply of sourced products increases in the third period. When completed this year, we will have the only fully integrated rigid LVT plant in the United States. With the closing of Godfrey Hirst, we are shipping out new product introductions in the American market to enhance their sales. For the second quarter, we accelerated sales of impaired Mohawk inventory to consolidate Godfrey Hirst U.S. warehousing with ours. We've already moved their U.S. inventory into our warehouses and integrated their U.S. business into Mohawk's, which will improve the service levels for their customers. Our residential carpet improved, led by the builder, multi-family and Main Street channels. Our introductions in SmartStrand Silk Reserve, Air.O unified soft flooring and our luxury Karastan collection gained momentum in the market. Our proprietary Continuum polyester products offer consumers an appealing value option without any compromise. We are expanding our Continuum capacity to meet the growing demand for these collections. Our Main Street product offering has expanded to include easy-to-install carpet tiles that are being well received. Our RevWood collections with waterproof technology are growing rapidly in the retail and builder channels as an alternative to hardwood. In commercial, our hard surface collections showed stronger growth and our commercial carpet bookings strengthened as we progressed through the period. The specializing of our sales force by end use is gaining momentum and broadening our reach as customers recognize that our complete flooring solutions will make their projects more successful. As we enhance our systems and processes, we're improving the customer experience, while reducing our administrative costs. We've begun consolidating customer service into a single platform to make it easier to satisfy all of our customer needs. Our U.S. LVT plant is ramping up as expected and producing both flexible and rigid LVT. We're implementing established procedures from our new European line, which is about 60 days ahead of the U.S. learning curve. During the period, our Flooring Rest of the World Segments were $590 million, an increase of 16% as reported and 8% on a local basis. Our segment's second quarter adjusted operating income rose about 15% compared to last year and was even higher without startup cost and expired patents. Our LVT sales were up dramatically and will increase more with our new manufacturing expansion. Our new LVT production line is ahead of the U.S. and performing above expectations. Until now, we've been producing flexible LVT and we have completed the initial production runs on rigid LVT, which we'll be launching in the third quarter. While these are being launched in the market, we will finalize additional collections to sell in other channels. Unlike in the U.S., we are leading the U.S. LVT market as it continues to grow. We are presently staffing up the new line to run seven days a week as we refine our processes to increase output and improve our costs. In laminate, we're introducing new products using unique technologies and water resistance. These products are differentiating us from the rest of the market and improving our mix. In Russia, we have increased our laminate capacity and we're introducing our latest European technology to increase our market share and margins. We're using our European sheet vinyl to build demand for our new Russian plant, which should start up by the end of this year. Our sheet vinyl products have been specifically designed for the Russian market and are being well received. To recover material inflation and currency translation, we're passing through price increases in Russia. Our new carpet tile plant in Belgium is ramping up to penetrate the commercial flooring market. We're filling the pipeline with our unique carpet tile collections to build a new European product category to complement our existing LVT, sheet vinyl, laminate and wood offerings. Our wood panels and insulation products grew significantly from our manufacturing investments, better material supply and stronger market conditions. We completed the acquisition of Godfrey Hirst on July 2, a month later than we had anticipated due to delays in the regulatory approval. We're developing strategies to become a total flooring provider in Australia and New Zealand as we have in the U.S. We're reviewing our combined sales, brand and distribution strategies for both soft and hard surface products. We can complement Godfrey Hirst's strong brands and market position and retail partnerships with our unique hard and soft products, operational philosophies and marketing strategies. I'll now turn the call over to Frank, who will cover our financial performance for the first quarter.

Thank you, Jeff. Net sales for the quarter were $2.577 billion, growing 5% as reported with our legacy business up 3% on a constant basis. We had growth in all three segments, but Flooring Rest of the World results showed the best improvement. Our gross margin as reported was 29.7% of sales, or 30.2% excluding charges, and was down from 32.7% last year. Higher inflation and startup cost with lower year-over-year productivity and volume were the most significant headwinds this period. Price increases and expansion of sales across many of our channels will improve our results going forward. SG&A as reported was 17.1% of sales, or 16.9% excluding charges. This improved 20 basis points over last year. Unusual charges were $16 million for the quarter and primarily related to plant consolidation and integration of acquisitions across all three segments. Our operating margin excluding charges was 13.3%, down from 15.5% last year as $23 million of price/mix did not offset $62 million of inflation. We also had higher startup cost of $8 million over last year and incremental productivity of $12 million, which was lower than first quarter. Our income tax rate improved to 20.7% from 24.5% as U.S. tax reform drove the overall rate down. We estimate a third quarter and full year rate of 20% to 21%. We recorded a $55 million one-time charge in the second quarter related to future payments of tax on past unrepatriated foreign earnings as required under the new tax law. Earnings per share excluding charges was $3.51, a decrease of 6% compared to last year. Turning to the segments. In the Global Ceramic Segment, sales were $929 million, up 3% as reported, with our legacy business up about 1.5% on a constant basis. Our operating income excluding charges was $140 million with a margin of 15.1%, down from 18.1% last year. Negative price/mix of $6 million and inflation of $25 million offset $9 million of incremental productivity. In the Flooring North America Segment, sales were $1.058 billion, up 2% over last year. We had the strongest growth in LVT and residential carpet, even though LVT was less due to sourcing delays. Operating income excluding charges was $110 million, with a 10.4% margin compared to 13.4% last year. $7 million of price/mix did not cover incremental inflation of $30 million. We also had negative productivity of $3 million with a lower production rate, new product inefficiencies and a tighter labor market. In the Flooring Rest of the World Segment, sales were $590 million, a 16% improvement as reported, with the business up 8% on a constant basis. Our operating margin excluding charges was 17.2%, which was about flat to a 17.3% margin last year, even with startup and expiring patents. Incremental price/mix of $22 million offset inflation of $8 million. We had incremental productivity of $6 million and startup costs of $5 million. In the corporate and eliminations segment, our operating loss excluding charges was $9 million. We expect the corporate expense to range from $35 million to $45 million for the full year. Turning to the balance sheet, our receivables ended the quarter at $1.738 billion. This included days sales outstanding of 56 days in the second quarter, which was flat compared to the first quarter. Our inventories ended the quarter at $2.061 billion. Inventory days were at 112 days, which was an improvement over the first quarter at 116. Inflation negatively impacted the calculation. Property, plant and equipment ended the quarter at $4.421 billion. In the second quarter, we had capital expenditures of $247 million with depreciation and amortization of $127 million. We are estimating capital expenditures for 2018 of approximately $780 million with FX impacting us $20 million from our budgeted rate that we used at the beginning of the year, plus we've added some smaller investments. Depreciation and amortization is estimated at approximately $520 million for the year. Long-term debt was $3 billion with leverage at 1.3 times debt-to-EBITDA. Jeff, I'll turn it back over to you.

Thank you, Frank. We're taking a comprehensive approach to improve our performance and profitability in the United States. Our initiatives to improve pricing, increase sales and growing channels and reduce costs will benefit the remainder of the year. Given the impact on inflation, timing of price increases and other challenges, we do not anticipate our actions in the United States will offset the pressures that we're facing before next year. We expect continued strength in Europe and Russia, where inflation and shifting product preferences are less intense than in the United States. Having closed Godfrey Hirst, we are already enhancing the largest flooring provider in Australia and New Zealand. In the recently announced Chinese tariffs – if the recently announced Chinese tariffs are implemented, they will enhance our U.S. market position and results. Around the globe, we're entering new product categories and geographies as well as expanding constrained categories. In the U.S., we're investing in growing categories such as LVT and quartz countertops. Taking all this into account, our EPS guidance for the third quarter is $3.54 to $3.64, excluding any one-time charges. We are taking actions to offset inflation, raise transportation, reduce costs and expand LVT. In the fourth quarter, we expect operating income to approach last year, though inflation and exchange rate changes could impact. Next year, pricing should be more aligned, startup costs lower and we should benefit from our investments to improve our results. We'll now be glad to answer your questions.

Your first question comes from the line of Keith Hughes with SunTrust.

Thank you. Really, two questions. First, Frank, you had called out a negative $3 million of productivity in Flooring North America. Could you talk about what all's in there? That's usually a positive number. I assume there's some slowdown of production in that, but what all makes up the negative $3 million?

Let me just give an overview. Productivity was impacted by lower manufacturing, new product inefficiencies and employee turnover costs. Improvements have come from cost cuts, product improvements, higher yields and lower inventory reductions in total.

So, in your third quarter guidance, do you expect a kind of similar result to what we saw in the second, or will it improve?

I think the productivity is going to improve in the third quarter, Keith. We also had some – the manufacturing shutdowns we talked about, that was in there. We had some labor inefficiencies from the tight labor markets, that would have been in there. And we had some material yield issues with new products that we're putting in, that was in there. So, that's some color on what's in there.

Okay. And final question. You're coming at below your guidance here that you gave three months ago. What happened – or two months ago. Could you give us, in the intervening period, kind of what didn't occur that you thought was going to occur anywhere on the income side?

In the second quarter, we had a stronger dollar and a delay of Godfrey Hirst closing, which impacted results by $0.10 a share. The results were also impacted by lower sales than we anticipated, input inflation, transportation costs, lower LVT supply and a tight labor market, which increased our costs. In addition, we had a lower product mix than we anticipated and we reduced our production volumes more than we had thought to begin with. We also had the timing of the price increases were later than we had anticipated. Offsetting some of this, we're raising prices, as we said, in transportation. We're ramping up the expansions. We're expanding in growing channels. We're sourcing more LVT and cutting costs.

Okay. Thank you.

Our next question comes from the line of Mike Dahl with RBC Capital Markets.

Hi. Thanks for taking my questions. Sticking with the cost side, because clearly some things are happening in real-time and have accelerated faster than anticipated. I wanted to focus specifically on freight. And could you just help us understand and quantify how much freight represents as a percentage of other costs or revenues, and really how you're contracting for that and kind of what you can do aside from the surcharges to manage?

The freight is different across different parts of the business. We run our own freight and trucking systems for a significant part of it. So, we have the same gas and capacity pieces in that one. In addition, we contract freight on a as-needed basis on a significant part, more in the ceramic side than the other, and it's going up with the freight rates across the country as is everything else, is it. We are also expanding our freight system and we're putting more trucks in and using more of it to have more control over the costs given the expansion of the margins that are going on in the freight charges.

And Mike, just to clarify, the freight issue is more U.S. than Europe. Our overall freight runs about – freight out runs about 5% of sales. But again, it's going to be split between U.S. and Europe. It's going to be higher – it'll be higher in some...

Ceramics is going to be probably double that.

It'll be higher in some and lower in others, but that's the average.

Okay. Okay. Thank you. And then, with respect to those closing comments around 2019 pricing being more aligned, obviously, some of the startup costs and other things rolling off. I guess, two-part question. Can you give us kind of an expectation more explicitly around is that meant to convey confidence that margins will improve year-on-year next year? If so, by how much? And then, in the past, there have been a couple of times where you've been willing to talk about – of market expectations and how that should affect your organic growth portfolio or across the portfolio, I should say. At a high level, how are you thinking about what organic growth should be for your business given all the moving pieces underneath right now?

We expect the income to improve based on what we know today. We expect the expansions to help our top line more. The margins, I'm not sure at this point. We haven't got the budget set out that we're ready to put out yet, but you have the ramping up of these lines that at some point they're going to add operating income, but the margins are going to be below because they're not optimized. And so, the margin percent is going to be different than the others as we're absorbing a lower-margin percentage as these plants are not – there's not enough throughput and they're not optimized completely as they start, but we won't be able to give you more detail till later.

Okay. Thanks. And on the growth side, any thoughts on just what you're thinking around just organic growth as you look out over the next few quarters?

I mean, it's built into that – we gave you the results of what we gave you a fairly good direction for the next two quarters in our results. That's all we're prepared to give you at this point.

Okay. Thank you.

Our next question comes from the line of Stephen Kim with Evercore ISI.

Yeah. Thanks very much, guys. I appreciate the color you've given thus far. I guess my question, wanted to address the U.S. business specifically. Obviously, you've got a number of challenges that you've itemized there and some actions you've taken. Perhaps, I'm oversimplifying here, but I'm generally thinking about the impacts to your margin in the business in the U.S. portion of your business right now as being primarily dragged down by three things. One is the cost and freight and price or relationship and the lag there, and that's probably a transitory issue here over the next quarter or so – a couple of quarters. The second is that you've had production curtailments to right-size your inventory, which also impacts your productivity and other things. And then, the third is a longer-term transition in particularly the area like ceramic, which LVT is cannibalizing to a lower-margin mix, which seems less transitory. That seems maybe more of a permanent shift. And so I was wondering if we thought about your U.S. business margin in that way, these three categories broadly, how big do you think those three components are? The two relatively transitory one and the one that may be a little bit more longer-lasting?

They got to be different by product categories and pieces. I'm going to have a hard time averaging them all out for you. The ceramic business, we are participating in lower areas, which is reducing part of the mix. On the other hand, the ceramic business has a much – the majority of it is sold FOB local destination, so the freight charges are embedded in the pieces. So, you have both things happening at the same time is impacting margins. They will improve as we have raised the prices of the higher-value raw materials, but we're still – the mix is going down as we're increasing our share in lower areas as we go through it. On the carpet side, we are chasing the raw materials up as you described and the price increases were later than we expected in implementation. And the amount of increases is increasing more. Part of the piece about the future is we're not sure where the raw materials are going to – they may have peaked already or they may not have. And we're having to watch it as we go, so that's impacting it. We're passing through the raw materials and prices. That will recover as we go through the year and it'll put us in a better position when we go into next year.

Maybe, Frank, do you want to try to take a stab at quantifying some of those pieces, as I laid out? Because I think that this is an issue that people are really grappling with. In particular, the longer-term effects of a shift towards a more builder and home center related set of customers being a bigger part, particularly the ceramic business. Is there a way to think about what the longer-term margin impact of that piece might be, because I think that's a pretty important factor in people's minds?

Stephen, I don't know if you can hear me or not, but I'll try. Our product mix declined in the U.S. as we increased the home center and builder channel. In addition, freight cost and the reducing of production also impacted it, and I would say about 50/50. 50% of it was price/mix and 50% was the transportation cost and taking freight out. The freight, we're passing through higher freight cost to the customers. We are able to raise prices on the higher-value products that are more differentiated and we're starting to see improvement from those actions. The other thing I would say is that another area where we're increasing our sales is commercial channel, which will eventually have a higher margin and improve the mix. We're also introducing leading products and are selling, as we're introducing products, at our higher margin value. So, I think, over time, we'll start to recapture at least a portion of that margin.

No, that's very encouraging. Chris, I appreciate the effort there and I appreciate the info. So, thank you guys for that.

I hope you could hear it.

Can you understand him?

I think I got it, basically, that it's not all that – the move to home centers and builders isn't the only part of the story. There's other aspects of the ceramic actions that you're doing, which will be additive to margin and so will offset that longer-term concern that people have regarding the longer-term ceramic margins. That's what I heard.

Correct.

Exactly right.

All right. Thank you very much, gentlemen. Appreciate it.

Okay.

Our next question comes from the line of Justin Speer with Zelman & Associates. Justin Andrew Speer - Zelman & Associates: Hi. Good morning, guys. Really appreciate you taking the time. I wanted to get back to the timing comment you mentioned in the fourth quarter I think on margins that you think – and I think it's important for you to clarify for us – you think you can match the margin profile on a year-over-year basis, then you get back to even versus the prior year on the margin side? And then, following up on that, why is the third quarter expressing such a negative margin implication in terms of deceleration in margin in view of the pricing actions that you're taking place? Is there something else under the hood that we're just – maybe you can give us some context there.

Well, the third quarter is still being impacted by the input cost flow-through and we're still chasing it. We still are not going to have the pricing alignment anywhere near where we need it. There's going to actually be greater startup costs in the third quarter than there was and we're anticipating a more significant FX impact as we go – in the third quarter and we're not sure what it's going to be going through, pieces we go through as we go through with it. In the fourth quarter, we believe the price increases will be getting more aligned. They won't be perfect yet, but they'll be getting more aligned with the inflation as we go through. The startup costs, we're expecting to be a little lower. And with those things – and we should start getting some positive impact from some of the expansions we're doing, though, they'll be a long way from where we want them to be, is it. And with that – that's how we got to where we are. Justin Andrew Speer - Zelman & Associates: So, the flat comment is what you were saying? There's no other items to think about in terms of the fourth quarter. And so, just looking at the different domestic flooring businesses, I'm just following up on this recent question, and thinking about next year, how much margin do you expect you will recover as we look to next year relative to what you're seeing here in 2018 when you contemplate the raws, the under-absorption, the overhead, productivity drag, that maybe becomes a tailwind in 2019? Any context of the magnitude of the margin shave that you view as like temporary versus structural and setting that baseline for next year would be hugely helpful for investors, analysts if you could give context there.

As we get the pricing in line, the margins are going to increase because we're absorbing the raw material pieces without the benefit of the pricing, both with the raw materials and the energy and the transportation. So as those things align, the margin should expand in the categories. And then, this year, we had thought the business was going to be greater than we think it's going to be at this point, so we're also running the factories at less rates than the sales are coming in, which next year should also be aligned. And we should be at least making what's coming in, where right now we're making less than what's coming in. So, all those things will help the present business.

And just looking, Justin, into next year, you're going to see like we mentioned lower startup costs. This year we're estimating startup cost around $65 million to $70 million and next year the total startup costs should be a good amount below that. We've also talked about the fact that we're going to have the IP headwind behind us that we had to deal with this year. And then, finally, with all the capital that we are putting into the business, we talked about an incremental depreciation of $75 million this year, which incremental depreciation next year is going to be significantly less than that. Those will all be helped as we move into 2019.

And Justin, as the new expansion start up, the margins will be lower. But at some point, they'll turn from losses into incremental improvement. And as they keep improving, the margins are going to go up. Justin Andrew Speer - Zelman & Associates: And just to be clear, though, in the fourth quarter that you mentioned, is that EBIT being flat or margin? Just curious if that – was that EBIT dollar or percentage margin point that you mentioned for the fourth quarter (43:35)?

Dollars.

Just dollars. Justin Andrew Speer - Zelman & Associates: Okay. Perfect. Thank you. That's better context. Thank you very much, guys.

Justin, we actually said that to be specific that it would approach last year. Justin Andrew Speer - Zelman & Associates: Perfect. Thank you, guys.

Okay.

Our next question comes from the line of Michael Rehaut with JPMorgan.

Thanks. Good morning, everyone. First question, I guess, also just going back to pricing and just trying to better understand. Jeff, you mentioned I guess in prepared remarks and some of the answers here that one of the issues has been a timing issue around the implementation of the price increases. And I was hoping to just get a little bit better perhaps more granular detail around the cadence of those price increases. If you could kind of walk us through – and I think, specifically, the challenge has really been around North American carpet, but maybe you can tell me if there has been other areas or segments. But just to give us a sense for when those price increases were implemented so far this year and where you've had to delay, if that's the right understanding of it, where you've had to delay the more recent price increases from – I don't know if it was from May to June or June to August. Just give us a sense of the walk-through of how that's played out so far this year.

There's multiple issues at the same time. So one is our anticipation at the time we start putting the increase in, and the other is the actual way it flows through. And we make assumptions in a given point in time and they evolve with the market. So, part of what we said was in the second quarter, our assumptions, the actual flow-through was later than our initial assumption. The second is that we talk about that it happens on a given day. It happens over time as things work and it doesn't just turn on and off like a light switch. And so we're estimating those different flow-throughs at different points and when they're going to happen. And again, we have to act relative to market as they're going on in different pieces. So, those were happening. In addition, you talk about pieces. It's not just the carpet piece and the ceramic piece. The freight, which is probably 10%, is a huge part of it and the pass-through of the freight in many cases in ceramic is not a freight charge, but embedded in the product charges. And so, we took actions to improve it. They're going in now, but we've been absorbing it through the period and we're trying to recover in – in the ceramic business, we get it in multiple ways. We get it in raising product prices. There are energy surcharges and there are delivery charges for some portion of the freight. And so, it's a combination of all three. And then, the flow-through of one, so then you have multiple increases going on, which is really hard to manage from one to the second to the third and estimating how one is going to impact the next and how they overlap. It just makes the estimation hard. It doesn't change our implementation, but it makes our estimation. The more we have of it, the further off our estimates get.

It's obviously a complicated way to – a complicated process and probably even more difficult to measure. So I appreciate your thoughts and comments around that. I guess, secondly, just kind of moving to price/mix for a moment. I think the discussion around the challenges in the ceramic segment are pretty well discussed. I guess, it seems like what's perhaps new this quarter as well is in the Flooring North America Segment, comment around price/mix declining more than anticipated. And so, I just wanted to understand what product categories we're talking about there, and if it relates to some of the promotional activities that you had, I think, alluded to earlier. So, kind of like what product areas, what product segments, and perhaps what channels are you seeing that in?

First, you have to start at the – the builder channel has been doing better than the other channels with new home construction growth. And it tends to be, in most cases, put in by a third-party, who was interested in getting the price per square foot more than the best quality. So as it grows more – as the growth in it is higher than the others, is that you have the similar things in the multi-family business, is also a lower-quality product of things that are going on. And then the mix between all that decreased. We expected it to decrease some. It decreased more than we had anticipated.

So, are you saying that it's more of a mix within channels rather than the channels themselves on a like-for-like deteriorating?

A large part of it's that, but I don't want to leave you. There is some deterioration even within the higher-value remodeling channel, as you have – again, in carpets, you have this polyester is increasing its share. And polyester is a lower-cost product than everything else, but we know that's going on and that's in our piece. It just grew more than we had thought.

All right. One last one, if I...

One more thing I want to put in.

Yeah.

In the carpet industry and others, on the retail floors, people advertise price points. So as we raise prices on individual products, they will actually change the focus of their advertising because they want to maintain price points and they will swap a higher-value product for something that's less in order to maintain the price point is also going on. It's not new. It happens all the time, which is why if you look at the industry prices, the industry prices don't raise as much as the inflation over time, because the retailers trade the customers down, because they are focused on price points. It always occurs in every – all the time.

No, understood, Jeff. I guess just one last one on clarifying the guidance for the next quarter or two. It seems like trying to back in a little bit, if you kind of look at the EPS guidance and make some basic assumptions on the top line that the year-over-year margin decline, 3Q versus 2Q, you had about 220 bps of a 2Q margin decline. Frank, it would seem that 3Q might be a little bit of a greater margin decline. And is that the case? It might be up sequentially, margins might be up sequentially but down a little bit more greatly year-over-year? And I assume, is that just because of some of the flow-through on currency and maybe some productivity or production inefficiencies?

Yeah, Mike. The margin decline year-over-year in the third quarter will be larger than the margin decline year-over-year in the second quarter. And it's going to be a lot of the things that we've talked about in the second quarter; continuing inflation and how that's going to impact us, the delay of the price increases and such as that.

Right. And then, in 4Q, operating income on a dollar basis will be flat year-over-year is the last part of the guidance.

Well, I think what we said is that it would approach last year's number.

Okay. Very good. Thank you so much.

Our next question comes from the line of Phil Ng with Jefferies.

Hey, guys. You're drawing down inventory in 2Q and 3Q for ceramics in North America, I assume partly that's due to weaker-than-expected demand. Was that driven by increased competition or just weaker overall demand? And it'd be helpful if you could quantify that impact for 2Q and 3Q.

Well, we came into the year with higher inventories than we wanted to have and we started gradually taking those out, but we're still going to be operating at the 85% to 90% overall utilization rate in the company. And I think what we said, about half of our margin decline was lowering inventories and freight, and I would say a bit more of that half was freight.

Okay. That's helpful. And then, pricing historically has not been a big driver of ceramics. Can you give us a sense on the market acceptance of some of these price increases you guys have out there? And the traction you're seeing, is that coming largely from the high end of the market or just pretty broad-based? Thanks.

Well, what we found is as we're trying to pass on these freight increases and we took pricing to do it, the lower end was more sensitive to those prices, whereas the higher end of the mix that would be driven by commercial and other things were more accepting of the price increases we took.

Okay. But you've seen pricing across the board, but I guess just more traction on the high end?

In the low end, we're just passing through the freight. In the high end, we're passing through the freight and additional costs on top of that.

Yeah.

Okay. Very helpful. Thank you.

Our next question comes from the line of Matthew Bouley with Barclays.

Hi. Thank you for taking my questions. I wanted to start out on the LVT business. First, the U.S. sourcing issue that happened in the second quarter, is that one-time, or is that something that can happen again? And then, just more broadly, you called out the improved mix expectation in Europe on the new capacity, but it wasn't clear necessarily what you're saying on the North American side. So, could you just please outline your expectations for North American LVT mix and margins going forward? Thank you.

What we said was that we had – our suppliers had problems in getting us product in the second quarter. They have overcome those problems and the production and shipments to us are higher, in line with what we would like to have, but it didn't just start overnight, so it's going to occur during the third quarter. What we said also was that we anticipated both our European and U.S. LVT lines increasing their manufacturing as they come up and that production will give us more capacity to sell during the period. We're also introducing more rigid products off both lines as well as importing products as we go through, and we expect our LVT business to improve significantly with all these things. In Europe, which is ahead, they focused on manufacturing flexible, which they had been limited in their capacity. So instead of starting it up trying to make LVT, which is why their sales were much higher, we've been producing flexible LVT for most of the time and then doing new product work with it. They are operating three shifts today and working towards adding a fourth one, where the U.S. is operating two shifts and working towards adding a third one is the way they're working out.

Okay, Jeff. Thank you. I appreciate that. Second question, back in the ceramic business and the growth in the lower-value channels, could you address why you think you're seeing less market opportunity in the higher-value channels? Is that specifically a function of LVT taking share from those higher-mix products? And if so, at what point is there a resistance to that share shift, if we think about the areas of your portfolio that perhaps may be less vulnerable to a shift to LVT? Thank you.

Well, I can answer that. So, the area that's growing the most for us right now is builder, which tends to be at a lower price point. We're also taking share in the home centers with our business. Slowly, our commercial business is growing. It is true that LVT has impacted the dealer business in particular.

Let me sort of – we all talk about LVT in the industry. Let me see if I can frame it in a way that it has – as well as sort of frame it as we go. The LVT, if you think about – let's back up. In 2017, there's broad estimates of it. So, we believe the range is somewhere from $2.4 billion to $2.8 billion. The best estimate we have of the increase in the category is about $500 million to $600 million. Now, if we assume that the LVT is going to continue growing at about that amount and the flooring industry is going to grow about 3% to 4%, the balance growth in everything else is going to be about 1% to 2% annually until the LVT matures and it will mature at some point in the not-too-distant future. And then, the growth will normalize across the categories. So, you have this mix that's going on. It's not the first time the industry has been through this. It happens a lot and you have to constantly adjust relative to these things. You can go back with things like categories. Laminate, at some point, started and grew. You had carpet tile, started and grew. You had polyester carpet taking over pieces. So, these shifts are normal. It's just the size of this one is bigger. And over a period of time, it will mature and then the industry will go back to more normalized growth. And if it grows somewhat like we're thinking, it's not like everything else is going to go to zero. It's just not going to grow as fast, while it's maturing.

Okay. I appreciate that. Thank you.

Our next question comes from the line of John Lovallo with Bank of America.

Hey, guys. Thanks for taking my call and I don't want to belabor this, I'm just trying to understand this a little bit better. Maybe if we just think about raw materials and freight costs and just assuming they stay kind of where they are today and let's assume that the current price increases that are in place all go through well, at what point next year, first half, second half, do you think that price-cost relationship will even out?

I think it probably will be sometime in the first quarter will be close. But your assumption on inflation freight, raw materials, I don't know if it's right to assume it's over or we have more to come. It could be either, which is why you hear us hesitating. We don't know exactly where it's going to be.

No, understood. That's helpful. And then, maybe just switching gears quickly and talk about the tariff that's been proposed. 10%, I guess, is a good start, but what do you think is the actual production cost advantage from producing in China versus maybe domestically? How big of a tariff would actually need to be put in place to kind of level the playing field?

We think that we can compete with the Chinese without any tariffs. Now, what's happening is we have to get the plants up, the new ones up and operating with enough throughput in order to get the costs and margins down where we like them to be. The tariffs, I think, are a broader piece which says that on the list is almost every product we make, and we're about 95% of what we make is made in the United States or is made locally. So, anything that raises the competitive alternatives will help all of our different product categories in the United States that we have, which is practically our entire business.

Okay. Thank you, guys.

Our next question comes from the line of Kathryn Thompson with Thompson Research.

Hi. Thank you for fitting me in today. Just wanted to follow up on LVT and just really instead of just looking at the quarter or even the next quarter, taking a step back and getting your strategic thoughts on how you approach meeting the increasing demand for North American LVT. And really, specifically, if you could clarify how much is currently sourced versus manufactured. And your thoughts given the changes in how this product is manufactured, where you're going to focus on your capital allocation sourced versus manufactured strategy over the next two to three years. Thank you.

In the United – so let me – in Europe, we manufacture all of it today. In the U.S., we manufacture a much smaller amount than we import and source today. But what was happening is we're putting in approximately another $250 million of capacity with the new plant that's coming up, and we've been hesitating and sourcing more, because we thought we'd have to use a majority of our efforts to sell up the ramp-up of the other one. We've changed our view given the growth of the industry and we think that we can sell up the ramp-up as it's coming up and more sourced, so we're doing both. The longer-term view is it takes us about 12 to 18 months to add new capacity and we'll make decisions on an incremental basis and we'll continue sourcing more and balance the two, and we really don't have to have a final decision. We just have to decide when we're going to increase more LVT and what rate we're going to put it in, and then adjust the sourcing strategy to go with it as we go through.

Assuming a low-double-digit growth rate over the next two to three years, against that scenario, what percentage – I mean, right now, we're estimating at least 85%, 90% is sourced, but does it get close to 50/50? And just helping us understand that would be helpful. And I have one follow-up. Thank you.

I don't normally think about the way you're approaching it, so I don't have it. I normally think of it on an incremental basis as the business is changing. And once we make the decision, then it's a matter of balancing the sales that we can grow with it. And we're trying going forward not to limit the sales, but just to balance the opportunities between the two pieces. I don't know how to give you a more defined proposition than that. If we find that we want to source more, we just slow down the piece. If we want to add more, we can add two machines at the same time instead of one, so we haven't finalized the optimum solution at this point.

Yeah. I guess, the importance of it is just the capital allocation for adding capacity, for product category that is changing, and how it's made is different than meeting the needs of sourcing. So, that was the basic nature of that question.

I think the piece is we're going to have a significant sourced portion no matter what. The question is, is it going to be 40% or 60%. I don't think it really – it doesn't change my strategy.

Okay. Great. And just one final clean-up question. Appreciated the color you gave throughout the call on ceramic, particularly about the price point falling in the quarter, but results would imply that perhaps there was a slowing momentum in North American volumes, but we may be off of that. And perhaps, you may have commented on that in the call and I missed it, but could you clarify just about the volume momentum in North America for ceramic sales? Thank you.

North America volume has actually been strengthening a little bit as we've gone through the year.

Perfect. Thank you so much. I appreciate it.

Thank you.

Our next question comes from the line of Susan Maklari with Credit Suisse. Susan Maklari - Credit Suisse Securities (USA) LLC: Thank you. I wanted to go back to the tariff question for a minute. And I guess, have you seen any change in behavior or willingness to work with you among some of the retailers that have been heavier on their sourcing for product?

There are some discussions about how they can prepare for it not knowing where it's going to be. They are taking multiple approaches. Some are talking to us. They're also looking for other alternatives in other countries. So, there's all kinds of preparation going on, not knowing what the end result's going to be. Susan Maklari - Credit Suisse Securities (USA) LLC: Okay. And then, I guess, the second question is, you noted that in your CapEx you've added some smaller incremental investments this year. I guess, can you talk to what those are? And broadly speaking, where are you thinking more about aligning your CapEx as we think about 2019?

Listen, I'll give you an example. A piece of property came up available adjacent to a large Belgian facility that's landlocked. And so, we bought a large chunk of the land to enable us flexibility in the future. For instance, there are other small things. So, I mean they're not significant to the piece. But it's those kinds of things. A big part of it came because of our assumptions on FX and what the purchases would be, both in translation and in the U.S., in both cases. So part of that, we had a lower – a different assumption for how it would – what would happen, so that was, I think Frank said, a $20 million part of the adjustment. Going forward, we're going through right now our annual strategy plan of capital and investments for next year. So, the businesses are going through a process of deciding where they think the opportunities are, what the values are and where they are. My belief is that the number's going to be significantly less because of all the capacity and new pieces we have in it to go through it. The opportunities are going to be do we decide to go and expand in some places that I don't know at this moment. So, we haven't gone through it, which is why I can't give you direction for it. And then, we also have to put in how we see the risk of whatever utilizing them as we go through. Just as a comment, maybe on some of the old stuff, there seems to be some confusion over our ability to use it. So, let me see if I can clarify that with you while you bring up the subject. The majority of our new investments, which I went through them in the leading remarks, are outside the United States either to relieve constraints or to enter new markets. And at a high level, if you just look at the additional sales, LVT is about $500 million of the total with the two lines we have going in. We have about $400 million where we're going into new products which we mentioned like sheet vinyl in Russia or like quartz countertops in here, and other ones that's going into new products or to the same products we have in new geographies is about $400 million. So, the existing products make up about $400 million of what I would call expansion, again, which a large chunk of that's outside the United States. If you look at inside the United States, everybody is worried about us running it. The big investments in the United States are LVT, which the question is are we putting in enough; and quartz countertops, which is a $1.2 billion industry growing at least 10% a year, and there's huge opportunities in that one. So, I mean, we think we have the investments in the right area. And I know you like me to tell you about our next year. I mean, they could be zero for all I know right now. But I doubt it. I think we're putting the investments in the right areas that are going to help our growth and maximize our business. Susan Maklari - Credit Suisse Securities (USA) LLC: Okay. Jeff, thank you very much for the color.

Our next question comes from the line of Michael Wood with Nomura Instinet.

Hi. This is Mason on for Mike. Is LVT sourcing issue specific to Mohawk? Or is it an industry-wide issue?

I don't have enough detail to answer that. So, I don't know. I would assume that other people had some of the same issues, but I don't have news (1:11:49) of them.

Okay. And then, are you able to quantify how much has impacted your LVT growth rate in the quarter?

Listen, that's like guessing how much I would have sold if I didn't have it. I think it would have been a significant number but, I mean, it's a pretty wild guess if I give it to you. It wouldn't be worth the paper it was written on.

Okay. Thank you.

Our next question comes from the line of Stephen East with Wells Fargo.

Thank you and good afternoon. Jeff, maybe we can go back to the margin profiles a little bit. If you look at carpet in U.S. ceramic, when mix shifts down, is that a temporary decline in margin? Or the lower mix product, does that permanently carry a lower operating margin?

It depends on – so let's just go. It depends if you shift – I'm going to make it simple. If you have low, medium and high, the low, medium and high operate at different margins, in general. So, if the medium shifts to low, that's going to push it down a notch. If it's just medium to medium, it's similar. Now, when you go medium to medium what you lose is, if you raise the prices, I'll just make it up, 5%, you lose the 5% revenues because they trade down to a lower total dollar amount, but the margin's similar.

Yes. Got you. Okay.

I would just add on ceramic is once this LVT levelizes and even if you get 1% or 2% growth in the top line, we're already operating at, let's say, 85% capacity, we're going to fill that capacity up over time and those margins will come up. The other thing that's happened in the category, right now, builder is what is hot and what's growing. Over time, the residential and the replacement, all that will – usually has leveled out.

Got you. Okay. Thanks, Chris. And then, just a couple of quick questions on pricing. You said pricing is slower in carpet and ceramic. One is, is that because competition is greater – is not cooperating as much or is that customer pushback? And then, the second thing on ceramic, specifically, at the low end, is pricing actually compressing in the U.S.?

What we were trying to say is, at a point in time in the past, we estimated what would happen. What we're trying to say is our estimates didn't match up with what we ended up doing or the industry. And so, it was later coming through. We're still getting the increases, it was just at points in time we estimate all the different stuff and it's a constantly moving target, which we adjust to. What was the second part of the question?

Yeah. And a follow-on to that, do you think that slower is because of competitive pressures or just the consumer? And then, the second question was on ceramic, specifically, at the low end in the U.S., do you think that market pricing is actually compressing?

Listen, there are some pricing that takes longer to get in, in the marketplace. And what happens is as the amount increases over time, the portion that comes in later gets to be a bigger and bigger amount, because it compounds on itself, is part of what's going on. And then, what was the second part of it?

And then, just in the U.S. ceramic, do you think the low end, the pricing is compressing there?

The low end has pressure on it. As the dollar strengthens, it does create pressure on the low end, which is where most of the – the huge part of the imports are. So, the exchange rates impact it. But I mean we've gone through exchange rate changes for the last 20 years and the same thing occurs. As you would suspect, when the dollar gets much stronger, we have to react.

Got you. All right. Thank you.

Not been any fundamental change that the exchange rate that Jeff talked about was a change. And I think in general, us and other manufactures came into this year with a little too much inventory. And I think there's been some adjustment, but no fundamental change.

Okay. Yeah. That's what I was getting at. All right. Thank you.

Our next question comes from the line of Laura Champine with Loop Capital.

Thanks for taking my question. It's about LVT and could you just give us what percentage of Q2 sales were in that category and where you think that could be a year from now based on the investments you're making?

We don't normally give out sales by specific products and pieces. The two new lines what we said will add about $500 million of sales when they're optimized and then we have the option of supplementing that with increased sourcing products by whatever number. And then, within 12 months or so, we have the ability to add increments of whatever we choose if we decide to go ahead with them. I mean, that's about as close as I can get you.

And on the mix shift on ceramic, which look like it was certainly more than what we expected and I think more than you expected, how long will that trend likely last? I mean, will we see a continuation into next year as builder continues to grow?

Part of the margin difference is in freight, which we're making arrangements. If you just look at the margin, assume it's all it, part of it is in freight which we're passing through. And then, we've also said that the higher-value products, we've already announced price increases. So, we have pricing going on that's going into the third quarter that should help the margins in the third quarter somewhat and get more of the benefit in the fourth quarter, which is also helping the fourth quarter.

Got it. And then, just a follow-on on our prior question. Can you give me as much as to say that LVT at this point is a double-digit percentage of sales overall for Mohawk? Or is it not that big?

I don't think we've looked at the total global LVT. It's probably a little bit less than a double-digit number.

Got it. Thank you very much.

Our next question comes from the line of John Baugh with Stifel. John Allen Baugh - Stifel, Nicolaus & Co., Inc.: I didn't think we'd ever get to me. It's 12:20. I appreciate you hanging in that long. Quickly, Jeff...

Listen, time's (1:19:56) ran out, it's over. John Allen Baugh - Stifel, Nicolaus & Co., Inc.: I really don't want to hear Chris talk and please don't take that personally. You mentioned sales were a little light of expectations in the second quarter. I'm just curious, is that because, for example, you didn't have as much LVT to sell? Or do you think the overall growth rate of flooring, whichever category it might be, may have slowed a little bit in Q2? And your expectation sort of on that macro level for the back half. Thank you.

It's got to do with a lot of things. One is that LVT going back we sort of explained the high-level view. LVT is taking a large part of the growth, is one. The second is that the growth categories for us, you're losing some of the dollar value by trading down in different – by getting a higher amount of sales in lower-value categories, which is also impacting the growth. And then, in general, I think there were certain channels in the industry that didn't do as well as we had anticipated. But I still think the industry is growing in the neighborhood of 3% to 4%. John Allen Baugh - Stifel, Nicolaus & Co., Inc.: Okay. And is there – you've been helpful on the LVT front. I believe once the $500 million of production comes up, you're going to be closer to that $1 billion number that you can manufacture. Correct me if I'm wrong. And then, we'd think about LVT sourcing as something incremental to that, but probably specific to the U.S. market?

We've said that when we get this thing running, we'll have over $1 billion of manufacturing capacity in place and then whatever sourcing we do on top of that. John Allen Baugh - Stifel, Nicolaus & Co., Inc.: Great. Thank you. Good luck.

Our next question comes from the line of David MacGregor with Longbow Research.

Hi. Rob Aurand on for David MacGregor today. I guess just sticking with LVT. Can you talk about what you're seeing kind of in residential versus commercial and as these new plants come up, where your focus will be between residential and commercial product?

Are you at LVT-only?

Yes. Focused on LVT.

We are selling both – we have product lines aimed at both the residential and commercial markets. We have product lines aimed in each one at low, medium and high-value products. We are putting in new products to expand our offering in all categories in the marketplaces, and we think we have enough supply as our new capacity comes up and our sourced product to support both high to low in both categories.

Okay. Thanks for that. And I know there's been a few questions on the tariffs, and I realize that there's a lot of uncertainty at this point, but do you have any sense of if they do go through at these current levels, what kind of share could be up for grabs for you to benefit from?

Listen, the market moves based on relative values of products, and if you raise the imports, which are large in LVT, they're large in ceramic, what else is large? There's a wood piece that's fairly large. If you raise them all by 10%, there's going to be beneficiaries of all of those who are here. And we think we're one of the largest.

Okay. Thank you.

Our next question comes from the line of Eric Bosshard with Cleveland Research.

Good morning. Two questions. One, a follow-up. Jeff, you made a comment about if you were going to source 40% of LVT or 60% of LVT. Is that a long-term plan or is that just as you're working through the growth and managing the growth of that category?

Listen, I didn't give it more than about a minute's thought. In Europe, we're not doing any and what I keep saying is we are adding the capacity here. When we get it up and running, we will evaluate the benefits and detriments of adding more. And in 12 months, I have the capital, I could add two or three machines in 12, 14 months if I chose to. So, it just depends on how it evolves and what we perceive as the value of doing it. And we have capital that's available, we have a strong balance sheet. It's just a matter do we like the economics and do we like what's going on. And then part of the decision has to be where do we think we are in the cycle and what do you want to invest based on the cycle. So, it's not a single view of the question.

Okay. That's helpful. Secondly, you have – what appears to be going on is a combination of input cost pressure and currency issues and investments in startup. You've endured these things before, but it's never added up to the magnitude of margin and earnings erosion as it is now. Why is this adding up to the magnitude of the step-down now, especially in a market growing 3% or 4% and it hasn't in the past? What's different that makes the impact more dramatic now than we've seen historically?

I'm not sure I agree with your conclusion. We've been through – you remember when oil went to $140? I mean, we've had dramatic changes at points in time both of raw materials that we've lived through. We've had dramatic changes in, not of this magnitude with products, but in the last eight years, in carpet, polyester carpet's gone to 50% of the industry. It was about 10% when it started. You can go through – laminate didn't exist and it became 8% of the industry. I mean, we've lived through these in each piece. In the commercial carpet business, we had – I mean, basically carpet tile didn't exist and now we have a large position in carpet tile. In ceramic, seven, eight years ago these digital printing things didn't exist. There were no wood products. The wood products with digital printing are 25%, 30% of the industry today. I mean, we live through these shifts and market changes in every category, and it's not do they occur. They occur about every 10 years in something and we have to continuously adjust our business to the changing environment. The companies that don't change, I can give you a long list that aren't here anymore.

Yeah, I guess – and I probably stated my question poorly. Considering like that long list of what you mentioned, which is similar in ways to what is going on now and I've followed the company for a long time, none of those have translated into the magnitude of earnings erosion as you're experiencing in 2018. And so, my question is why is the earnings impact of this transition so much more significant than when you endured all of those that you managed through with less earnings volatility?

I don't remember the dates, but I can almost guarantee you the same thing happened and it probably was worse. I mean, I seem to think somewhere around 2000 there was one of these, but I don't know. I know there was one about 2008, maybe – I mean, I don't have the dates because I haven't gone back historically. But I mean, we've been through it multiple times. It's not if they occur, it's when's the next one.

Okay. Okay. Perfect. Great. Thank you.

Our next question comes from the line of Alvaro Lacayo with Gabelli & Company. Alvaro Lacayo - Gabelli & Company: Good morning. I just have one question. In the past when you talked about all the new capacity that you were investing in, you talked about needing to improve to get utilization up in those plants and that would have an impact on mix. And over time, you would see improved mix driving through that new capacity. Maybe if you could talk about how the new capacity that has come online and in general across the portfolio has impacted mix in the quarter. And if you can sort of maybe put some dollars behind that, as well as the inefficiencies that you've seen from starting these plants up. Putting some numbers around that would be helpful, I think.

So, let's see. When you start up a new plant and – I don't know, I'll take the LVT plant in Europe, I guess, it's further along. You start up on day one, and for a period of time – in day one, you start up with one shift. And at that point, you are trying to get out mechanical problems and other things and you're trying to devise the process in order to get it to operate. You have mechanical changes, process changes that have to be done. You then go to two shifts, which allows you to operate around the clock. And in that time, you're still having unplanned shutdowns, you're still having production levels below where you expect and you're still making changes. You're training people, who are making errors in what they do and then you're adding things to the equipment in order to operate it better and get better results on it. You then go to three shifts. Now you have to train people and you train more people that have to do it, and the training costs you much. And the training, the people make mistakes as they do it because they're all new and they haven't done it. During those times, you try to keep the product production as simple as possible because you don't want to take all of those things that are going on and make the – and have to have them change products frequently and dramatically while it's going on. You then get into the second stage, which you're somewhere in that one which we are in Europe and then you start introducing new products. So, we started bringing in the startup of more differentiated rigid products. You start bringing in features and pieces and you start manufacturing new products that have low productivity levels. You are managing the composition and the processes as you go through and you may even be making more physical changes to the equipment. In Europe, we're in that stage and we have made new products in rigid and they are – we made production runs and they're being made into samples in order to introduce them there. While that one's going on, you then start adding more. We're in the process of getting ready to add more people and then we take the production and start making more products that are new. And you start trying to add more features and benefits to all those, and that's happening. With all that happening, you're still running at higher waste levels. You're still running at lower throughputs than you would expect, and those are all impacting the margin percentage of the business as you go through. And at some point, you're going through all that and you go from an operating loss to an operating profit, but you're still running at low production rates and high waste levels and you keep going up. Now, depending upon how big a business it is, in another case, you may not have the sales opportunities to ramp it up. So now you have to go build market share to ramp it up and it takes longer because the market isn't large enough to absorb the capacity overnight. And it's the combination of all those things that, over time, you end up with an optimized business that's making product at very low cost. You have enough throughput to get the fixed overhead down and it ends up operating at a margin that's typical of your business. Now, when you get through with all of that, the positive of it is you end up with a business that you didn't pay for the sales and margins like you would in an acquisition. What you've had to do, though, is pay for (1:33:19) all those inefficiencies and startups during the period, but when you get through, you have a much lower investment collectively than you did when you bought the sales and cash flow of an existing business. Does that help? Alvaro Lacayo - Gabelli & Company: It does help. And I don't know if you can, but maybe putting some numbers around that and maybe based on what you think normalized expectations from those plants are versus where they are today just to get an idea of what kind of room for improvement we could be seeing over the next 12, 18 months.

Listen, have you watched Tesla startup? The things don't go as planned in things that haven't been done before. Is it? So, putting an exact date and time on it is impossible. What I can tell you is when we get through that the margins on that $500 million we're putting in will be at least as high as the rest of our business. And it'll be in place and operating well sometime in the not-too-distant future and it could be a year, it could be a year-and-a-half. Hell, it might take us two years to get to the optimized piece, but I mean it doesn't change the result of where it is. Alvaro Lacayo - Gabelli & Company: And that's versus a current loss at the moment. Is that accurate?

I don't know whether the thing's – listen. I don't know whether that one specifically is breaking even, losing money or making a little right now. Alvaro Lacayo - Gabelli & Company: Okay. Okay. Thank you very much.

At this time, there are no further questions. I will now turn the call back to Mr. Lorberbaum for closing remarks.

The industry and we go through dramatic changes in raw materials. We go through changes in the products, as we discussed. We've handled the situations before. The business goes through temporary compressions of our margins and the business ends up stronger and better when we're through. We're putting in place all the activities that we need to, to get to the other side. The investments we've put in, after the fact that we're now a year later with all these investment decisions we make that are going in, they are still the right things to do for the right reasons and they still help our business in the long term. We appreciate the support and questions you give us. Thank you very much.

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