Frank Boykin - Chief Financial Officer and Vice President Finance Jeff Lorberbaum - Chairman and Chief Executive Officer.

Bob Wetenhall - RBC Capital Markets Stephen Kim - Evercore ISI Michael Rehaut - JPMorgan Eric Bosshard - Cleveland Research Company Stephen East - Wells Fargo Scott Rednor - Zelman & Associates Kathryn Thompson - Thompson Research Group John Baugh - Stifel Tim Wojs - Baird James Armstrong - Vertical Research Partners John Lovallo - Bank of America Keith Hughes - SunTrust Susan Maklari - UBS Laura Champine - Roe Equity Research Brandon Rolle - Longbow Research Sam Darkatsh - Raymond James.

My name is Heidi and I will be your conference operator today. At this time, I would like to welcome everyone to the Mohawk Industries Third Quarter 2016 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answers period.

[Operator Instructions] As a reminder, ladies and gentlemen, this conference is being recorded today, Friday, November 4, 2016. Thank you. I would now like to introduce Mr. Frank Boykin. Mr. Boykin, you may begin your conference..

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

I'd like to remind everyone that our press release and statements that we make during this call may include forward-looking statements, as defined in the Private Securities Litigation Reform Act of 1995, which are subject to various risk 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 third quarter, our growth strengthened and our margins continued to expand. Our earnings per share for the period were $3.62, a 25% increase over the prior year or $3.50 per share excluding unusual items, an increase of 17% and an all-time record for the Company.

Our strategy of investing in our existing businesses as well as synergistic acquisitions continues to deliver record results. For the period, our operating margin excluding unusual charges and 160 basis points to an all-time high of 16% as a result of higher volume and productivity.

Our revenues as reported for the second quarter were 2.3 billion, an increase of 9% on a constant days and exchange rate basis. Our organization continues to create new products with greater value to the consumer to introduce unique ideas that enhance our processes and to invest and technology and equipment that improve our cost, quality and service.

The four acquisitions we completed in 2015 contributed to our results as we enhance their performance by upgrading their offerings, expanding their distribution and improving their productivity.

As expected, excluding unusual charges, our SG&A costs as a percentage of sales improved 60 basis points, as our investment and sales personnel marketing and merchandising increased our sales and mix. In many of our product categories and geographies, our operations are running at or near capacity.

These include all of our Global Ceramic, laminate, and sheet vinyl asset. Additionally, we are currently selling all of our LVT we are manufacturing even as we continue to increase our production capacity in the U.S. and Europe.

To meet our growing customer demand, our capital investments this year will be the highest in our history as we invest almost $650 million in additional capacity, more efficient assets and new products. Our strong results have increased our cash flow, enabling the expansion of our capacities and the pursuit of attractive opportunities.

We continue to explore potential acquisitions from around the globe that complement our business and expand our geographic reach or product categories. In late October, Moody's noted that the U.S.

consumer spending is growing at a healthy pace through the job creation and wage growth, higher disposable income, strong consumer credit and pent up demand to replace aging goods.

The National Association of Homebuilders affirmed that single-family housing demand should continue moving forward in the months ahead and that remodelers nationwide are seeing increased demand.

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

The European Central Bank remains committed to keeping interest rate at historic lows and buying bonds through at least March of 2017. Although, Russia remains in a recession, economists believe the economic slowdown is nearing a bottom. I'll now review our third quarter performance by segment.

Our Global Ceramic segment sales rose 4% as reported, and 6% on a constant based and FX basis with currency translation in Mexico and Russia negatively impacting our sales as reported by $5 million during the period. Operating income for the segment excluding unusual charges grew 13% over last year due to improvement in volume and productivity.

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

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

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

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

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

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

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

Our European ceramic sales grew significantly in both Western and Eastern Europe from our sales and product strategies focused on local markets and preferences. In Western Europe, our investments in the state-of-the-art equipment have allowed us to bring unique products to market and expand our margins and mix.

Our product introduction during the last two years had made us the leader in wood, stone and ceramic visual in large and small formats. We are expanding our participation in the commercial channel by increasing specifications with architects, designers and property managers.

We will complete the upgrading of our high-end commercial asset by mid 2017, which will finish the entire overhaul of the Italian operations we acquired in 2013. We are also entering the ceramic slab business and anticipate production of countertops and large ceramic wall coverings by the end of next year.

Our Eastern European ceramic business improved as we expanded capacity in Bulgaria and upgraded the style and design of our products. We are shipping products from Bulgaria to the U.S. and Western Europe to grow our business.

We are in the process of transitioning our Bulgarian operations to our Italian operating system, and we expect this project to complete in the first quarter of 2017. In Russia, the economy appears to be bottoming out, and our ceramic business there is operating at capacity.

During the period, our sales improved on a local basis as we increased our participation in the new construction sector and expanded our distribution through investments in owned and franchise stores. Sales of our new product introduction have reinforced our style leadership and improved our mix and margins.

Next year, we will install new capacity to enhance our offering and support additional growth when the Russian market improves. Our Flooring North America segment improved as expected, growing 6% as reported or 7% on an adjusted days basis.

Excluding unusual items, the segment's operating margin expanded the 15% from higher volume and productivity as well as lower SG&A as a percentage of sales. During the quarter, both our soft and hard surface flooring increased with hard surface growing faster.

Our commercial carpet and rug sales offset softer residential carpet, which was impacted by polyester growth and pressure on commodities. Our premium Karastan brand continues to grow with the expansion of our product offering and increased distribution.

The SmartStrand Naturals collection we introduced this year is positioned at the high end of the market, reinforcing our leadership in the premium category. Product innovation continues to drive our business with recent introductions comprising about one third of our carpet sales during the period.

Our commercial carpet performance continues to strengthen with all end markets growing. We've expanded our commercial sales force and are increasing our participation in individual projects and large national accounts. We announce our resident and commercial carpet price increase of 3% to 5% effective January to cover increased costs.

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

Our hard surface sales of laminate, wood, LVT and sheet vinyl continue to grow significantly with expanded margins. Our sales of these products are constrained by our present capacity, which are in various stages of expansion.

Our participation in all channels is increasing as result of the investments we’ve made in sales, marketing and innovative products. Improvement in our LVT production continues to increase our capacity and broaden our product offering. We're adding new capabilities to our LVT manufacturing plant, which will provide new product features next year.

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

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

Our Flooring Rest of the World segment performed well during the period, delivering a 15% in sales as reported and a 41% improvement in operating income on a constant currency basis, excluding unusual item. Our legacy basis with constant days and FX sales rose 8%. SG&A as a percent of sales continue to improve during the period.

We’re increasing prices based on market conditions to offset currency fluctuations. Our European flooring growth was lead by LVT and wood partially offset by lower sheet vinyl sales, due to the disruption of production at our Belgium facility.

Our laminate business continues to grow due to the strength of our Quick-Step and Pergo brands in the premium part of the market. We’re leveraging the strong performance of our 2016 laminate introductions by expanding designs and sizes we offer.

Our European and Russian laminate plants are operating near capacity with expansions planed for Europe at the end of ’17 and Russia in ’18. We’re currently implementing process improvement to incrementally increase throughput and reduce cost. Our wood business continues to expand and was raised prices to offset material increases and currency changes.

Our LVT sales are increasing dramatically and our margins are expanding, as the product mix and productivity improve. In the period, our LVT sales were limited by our capacity which has recently been increased. By the end of the year, we will further modify our processes to expand our production even more.

In the interim, we’re supplementing our LVT collections with source products to satisfy customers demand. We began construction of the building for our new LVT line which would be operational at the end of next year. Our sheet vinyl sales during the period were lower as a result of a fire at the end of the second period.

The Belgium plant is now fully operational, and we do not anticipate any long-term impact. Our insurance will cover the majority of these costs. We continue to expand our commercial sheet vinyl sale and have announced pricing increases to offset currency changes.

Investments we’ve made to improve our costs of MDF and chipboard are increasing our margins. Our roof panel business remains steady. Sales of our insulation boards continue to grow, although lower material cost and manufacturing improvements are being offset by increased competition and unfavorable exchange rates.

We’re realizing the anticipated synergies from the integration of our Xtratherm acquisition. I will now turn the call over to Frank, to review our financial performance for the period..

Thank you, Jeff. Net sales for the quarter were $2.294 billion and grew about 7% both as reported and using constant exchange rates and days for our legacy business. We had one last day in the third quarter, and we will have one more day in the fourth quarter compared to last year. All segments had good growth.

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

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

Unusual charges this quarter were net benefit of $12 million.

This is comprised of a $90 million cash receipt for a legal settlement, partially offset by $48 million non-cash charge for a trade name write-off where we’ve changed our commercial business, commercial carpet business brand focus, and a $30 million restructuring charge of which approximately half is cash.

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

Other expense as reported was $5 million and includes approximately $3 million of an indemnification receivable recorded last year for our IVC purchase accounting. We have an offsetting tax benefit as a related tax liability was unwound. Our income tax rate was 26.4% for the quarter and that compares to 21.9% last year.

We expect our fourth quarter tax rate to range between 23% and 24% and our tax rate for the full year next year in 2017 to range between 26% and 27%. Earnings per share excluding charges were $3.50, up 17% over last year. Return to the segments, in the Global Ceramic segment sales were $822 million or up 4% as reported.

They increased 6% on a constant days and exchange rate basis. We had very strong growth both in Europe and in Russia in local currency with North America growth rate improving over the second quarter. Our operating margin excluding charges was 16.6%, that's up a 130 basis points over last year.

Contributing to the growth over last year was productivity of $14 million, volume of $6 million and a positive price mix of $7 million, partially offset by $4 million of SG&A investment.

In the Flooring North American segment, sales as reported were $1.9 billion, up 6%, or up 7% using constant days, with the hard surface categories outpacing soft surface. In soft surface, both rugs and commercial carpet grew faster than residential carpet.

Our operating margin excluding charges was 15.3% that’s 140 basis points primarily from productivity of $16 million and volume of 12%. In the Flooring Rest of World segment sales as reported were $464 million are up 15% over last year. Our legacy business was at 8% using constant days and constant exchange rates.

Our operating margin excluding charges was 18.4%, up 250 basis points and it was positively impacted by productivity of $10 million and volume of $11 million plus deflation of $7 million. FX negatively impacted operating income by approximately $5 million primarily from the British pound.

We are planning to offset the sterling headwind next quarter with price increases. The corporate elimination segment had an operating loss of $10 million, and we expect this to be about a $36 million to $38 million loss for the full year. Jumping to the balance sheet, receivables ended the quarter to $1.506 billion.

Our days sales outstanding were up to 56 days compared to 53 days last year, due to change in the channel mix. Inventories ended the quarter $1.673 billion, our inventory days improved by one day to 104days in the quarter.

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

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

Thank you, Frank. Today Mohawk is in the best position in the Company’s history. This year, we are investing at our highest level ever to meet increasing demand around the globe. We are preparing for future growth by expanding our differentiated product offerings and increasing the capacity and efficiency of our operations.

With our continued investment and manufacturing technology, we are introducing distinctive collections to improve our sales and enhance our mix. We aggressively implementing productivity improvements across the enterprise and all facets of our business, and we are bringing new capacity online to support our growth.

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

Taking these factors into account, our EPS guidance for the fourth quarter is $3.16 to $3.25, which represents a 12% to 15% increase over our fourth quarter 2015 EPS excluding any restructuring charges. I’ll now be glad to take any questions..

[Operator Instructions] Your first question comes from the line of Bob Wetenhall from RBC Capital Markets. Please go ahead..

Good morning. What a fantastic quarter. Thanks for all the detail, Jeff. I was hoping you could spend a little bit more time articulating what's going on with capacity. It sounds like you're sold out in a number of markets.

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

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

We’ve announced the increase of our plant in Mexico, which is outside Mexico City, it’s going to -- we’re going to double the capacity. That will be done in end of next year. Moving to Europe, we’re placing the balance of the assets that we acquired in a high end part, that are focused more on a high and commercial part of the business.

Those should be in place sometime about mid year, I believe. In addition, we’re putting a new capacity to go on a new product category, which makes ceramic slabs and those can be used for countertops and walls and other pieces as well as floor. We have recently increased the capacity in Bulgaria.

There won't be any more in next year; and in Russia, we’re increasing our capacity next year to prepare for the Russian market to improve, once if we can move around the world -- I'll sort of combined some of these, because they are intertwined. In the laminate business, we're using all our capacity in that US, Europe and Russia presently.

We have expansion plans for all three. Some of the equipments going to be off, as it going to take a while to get it in, we’ll expand the U.S. in the fall of next year followed by Europe and then followed by Russia. And it's just the matter of timing of the supplier to get the equipment in.

In the wood business, we’ve been putting in a new engineered wood plant, which we will be starting, which is in the middle of starting up this fall, and engineered wood which is also running in capacity. The LVT businesses, we're running all the capacity we have in the US and in Europe.

Both of those are making incremental increase as we speak in each one, and I’ll continue to do so probably through the first quarter of next year. We’re in the process of adding another production line in both Europe and the US, which will be working at the end of next year.

And total combine will have about over a billion dollars of capacity in LVT, as a new category. There are some other smaller things like we just put up a new pad plant in the Western United States, which will fill out our padding strategy across the United States.

We have got put in new capacity to make two new types of rugs recently, and we’re looking for alternatives everywhere. The best investments we can make are the ones in internal investment. They have the highest paybacks and lowest risk.

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

It sounds like you're keeping busy. What are your -- and maybe this is for Frank, what is your best guess on a preliminary basis for capital spending in 2017? You're going to maintain the same pace in terms of internal investment opportunities.

Is it going to be a $600 million or $700 million number? And I was just hoping you could step outside the quarter and maybe just talk on a bigger-picture basis. It seems like you're getting a lot of margin expansion.

Is there any way through gross margin performance or EBITDA you could talk about the margin benefit you're getting between, splitting it between productivity improvements and favorable operating leverage? I’m just trying to do a step-through or a walk-through to understand how CapEx can drive productivity enhancement. Thanks and good luck.

Great quarter..

Thanks. So, this year as we mentioned, we’re spending about $650 million in CapEx. It will remain elevated and next year probably more than that, we’ve not finalized the plant yet, but as a high likelihood it would be more.

I think if you look at the CapEx, we’re spending this year and broke it down into three buckets maintenance, capacity and productivity margin improvement.

Maintenance is about 100 million; and then of the balance, this lapped, about two-thirds of spend is going towards capacity; and about a third of spend is going towards margin improvement productivity.

Next question?.

Your next question comes from the line of Stephen Kim from Evercore ISI. Please go ahead..

Well, thanks very much and let me also add my congratulations. It seems like you guys never run out of things to keep yourself busy with. So, running through all that capacity that you just did, I know in the past you have given us some guide on what you think the combined potential sales that can be supported through this capacity is.

But it's a moving target, obviously, because you keep doing more things.

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

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

Okay. But it's going to be higher than that, clearly, in light of everything that's been going on. Okay. My second question is, lots of things I'm sure that will be asked.

But just generally speaking, I was curious if you could talk about on the M&A front, how Brexit and maybe even more broadly the overall change in tone, moving against issues of free trade, how that, if at all, has affected the way you think about M&A in Europe versus the U.S...

I don’t think, it really impacts the way we look at it. We take each business depending upon geography and we determine what the risk or within that business. Most of our businesses, I think all the businesses. The majority of what we sale is in the local market in the same currencies.

So we’re really look at it and how the markets going to change, but we do across currencies, as well as with small and secondary to the core businesses that we’re trying.

So the biggest questions we have, depends on where you go, is the political environment, the exchange risks, and how those impact the competition as we speak and with required different returns based on the risks levels we do and makes it more difficult to do things in certain markets and others.

On the acquisition side, we’re always looking at acquisitions. We remain disciplined to ensure that you know we are taking a proper risk to getting the returns for it. At this point, our balance sheet in organization really allowed us to pursue multiple opportunities at the same time, if we can find the right one..

Your next question comes from the line of Michael Rehaut from JPMorgan. Please go ahead..

Thanks. Good morning, everyone, and congrats on the quarter. First question, Frank, you referenced the 7% organic number in the third quarter and cautioned not to expect that type of a run rate going forward.

But just looking at the guidance for the fourth quarter, it would seem that to get to that number you are probably still talking towards or getting at a good, healthy mid-single-digit organic growth rate.

Is that correct?.

No, I think what I said is it not going to be 7% going forward, but I think it’s going to be more than what we saw in the second quarter. That helps..

Okay. That does. And just also thinking about 2017, also on the top line, obviously referencing all the different types of capacity projects and the amounts that you’re spending over the next couple years, that’s going to obviously benefit the top line.

A lot of the capacity, I believe, that you just outlined before, Jeff looks to be going online let’s say the majority of mid 2017. So how should we think about the impact kind of on top of what you call end market growth, what type of incremental impact might we expect the different capacity projects to benefit sales on top of that.

Would it be a kind of 1%, 2% number or is it really more of a 2018 event?.

I mean, there are so many projects at different times, they flow in. I mean like we just finished the ceramic plant in Tennessee, that's running almost wide open already, is it. So, I mean, that's already happening. We have a wood plant that’s coming up, by the end of the year, it will be running full.

I mean, there is a lot of capacity is coming in all through the period, and it’s the support that the business I mean the largest we've gotten. In order to support the growth rate, it takes a significant amount of capacity to keep growing at these rates across the business as big as we’ve gotten. And we’re committed to keep the growth up..

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

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

Mike, I think margins going into’17 and the ceramic North America segment will continue to improve. And as we pull out the IP business out of the Rest of World segment, the margins in that remaining non-IP business will continue to improve as well..

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

Your next question comes from the line of Eric Bosshard from Cleveland Research Company. Please go ahead..

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

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

I would guess and the U.S. market to the flooring industry is going to grow 3% to 4%. So, it spread across all different pieces, and it depends on which part you're participating in, to do at in each piece is different. My best guess is that will probably what will happen next year at this point, and we’re hoping to do better than that.

What was the second part of the question?.

The North America performance in the quarter?.

Part of it was the second quarter was a little lower than we expected. Some of it got pushed in there. The other is the ramp up of our LVT sales and here with the new plant coming up, if all the investments we put in sales and marketing and new products all the way of 12 to 18 months. I mean these things don’t just show up to one minute.

It’s all the activities that we started, we talked about last year our upping our investments to drive business in North America and NRI places and we’re getting the benefit of that in our year and half later..

Your next question comes from the line of Stephen East from Wells Fargo. Please go ahead..

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

Do you think the sell through in the industry, particularly in North America, was at the same pace as what you all were doing? Or do you think there was something unique that was going on that maybe you all were selling in faster than the sell through was going out? Then the Ceramic, we're typically used to seeing Ceramic growing faster than your North American business.

Is this just because of your issues on capacity constraints, or you think there is a shift in what the market is? Which one is driving the market, if you will?.

Each category is grown definitely, so what happens is right now to have LVT is started from a relatively low base, it’s been accepted in the market place and it’s in the same place at laminate was in the mid 90’s to 2000. So with the investments we’re putting in it, it’s pushing it up.

On the other side you have the wood business that tends to be driven a lot by the new housing construction as a much bigger piece in new housing. So it’s doing better in the market in total.

Those two pieces are helping it and then all the other activities we’re trying to do to improve our own business relative to the market are helping our other parts..

Okay. So it sounds like the sell-through is matching up with what you all delivered then, just taking share out of it.

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

We’re in the very first initial stages of it. We just recently announced a 3% to 5% increase. It's to cover raw materials, energy, labor, medical benefits in it. We'll have to see how it evolves. We need the increases to cover cost changes we go through. On the other hand, we’re going to remain competitive in the marketplace. That we always do.

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

Your next question comes from the line of Scott Rednor from Zelman & Associates. Please go ahead..

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

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

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

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

I don’t want to get you confused. We have a countertop business which we act as a distributor in the United States and one of the largest distributors in the United States in a fairly fractured market. The ceramic countertop business started a limited number of years ago in Europe and it’s just ramping up in Europe.

And it takes a while to get the market to accept it. The same product in the U.S. is in it's really infancy. So it's a very small part of, it's almost none in the U.S. it's so small. So we're starting in Europe, where the market is already starting accepting it. And we’ll be shipping product from there to the U.S.

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

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

Hi, thank you for taking my questions today. Really tagging on the prior question, more conceptually, I know that you’ve given some detail on your countertop business and expansion.

But as you think about growing outside just Flooring and into other categories, could you give us more color in terms of strategic thoughts as you look over the next two to three years on where you’d like to grow, as you think about M&A beyond just Flooring?.

Let me start with Flooring before we leave it.

We are really in an unusual position most businesses around the world that we have the capacity to expand our flooring business into all parts of geographies around the world, it gives us the opportunity to Greenfield and/or acquire other flooring businesses that we think we can add value to and gives us a much broader market to play in.

Beyond that at some point, it wouldn’t be unusual for us to add another product category to our business, and there are a lot of options to do that. And we haven’t chosen one, but we’ve already be in it, yes..

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

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

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

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

Okay. Great. And my follow-up question. Once again you said earlier in the Q&A that flooring industry is projected to grow 3%, 4% this year and also into next year.

But in terms of the delta of your growth, how much of the upside was driven by market share gains? For instance, in big box and the soft side or is it -- would you attribute the upside to greater -- to just your increased sales efforts? Thank you very much..

Can any answer I give you that would be guess the data on market shares, there is limited data out there, where it is out there, I don’t have full confidence what the numbers remain quarter-to-quarter. They are influenced by a lot of pieces. I think that we are probably doing a litter bit better in some categories in the marketplace and most..

Your next question comes from John Baugh from Stifel. Please go ahead..

Thank you. Good morning and my congrats as well.

Jeff, could you tell us where you are in laminates with a waterproof technology and how important that might be to the future of laminates?.

So in laminate, we participate in laminate in the mid to high end part of the business and very little in the commodity part. And there are reasons for which is that, they are really different assets and make highly style, highly design product efficiently and then they are making commodity. So that’s where we set up.

If you’re going to participate in better one, you have to keep coming up with new innovative ideas to drive it both in style and features and we are the leader in the category until. And so what are the problems with laminate and wood is that it’s impacted by water and moisture in the house.

And so we’ve come up with another technology that allows us to give it dramatically better performance than the other products in the category and part of our expansions to support the expansion of that in the market place, which is one of many. And if you’re going to be the leader, every year you have to keep coming up with new one..

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

The first question was of moisture. There is no way to make anything out of wood completely moisture repellent. The technology that we have, if you spill things on them, usually you clean them up and the technology is in 24 or 48 hours, hours is almost nothing happens to it, where they the competitive products I mean dramatically degrade in the time.

So we see that as a significant value proposition in the market place. One the other one, we don’t give out this specific numbers of individual product categories in our segment, I’m sure you’re aware of..

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

Our goal is to continue expanding our business and the best thing it could happen with these that I need to keep sourcing significant amount..

Your next question comes from the line of Tim Wojs from Baird. Please go ahead..

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

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

First, is the state, we’ve got tremendous number of projects and I think we said hundreds of projects across the business that people are working on both capital investments as well as process improvements that are driving those productivity numbers. We’re in the process now in putting into our plan for next year.

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

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

The commercial business, I think in generally probably has weekend a little bit. I think that our product offering, our investment with sales and marketing are helping us to improve our position and the marketplace at this point. We have a very high part of the ceramic market that we do at the same time.

The LVT and large part of the LVT is going into the commercial business. The carpet tile business is growing for us, and these investment and sales force and product design and features and benefits are helping us push all the categories through the marketplace. So I think more than anything, it’s really where we started.

The business is in the best position from a manufacturing standpoint, from a cost standpoint, from a product innovation standpoint, execution standpoint and it’s helping us in all areas..

Your next question comes from the line of James Armstrong from Vertical Research Partners. Please go ahead..

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

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

It’s too early to tell. The marketplace has been growing significantly I would guess in the United States, it probably grew 300 million or more this year, just in growth. It's possible it could grow that or more next year. So there's plenty of opportunity for growth in the marketplace. The question is, as we get further along.

Where is it going to plateau? And it's too early to tell..

Fair enough.

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

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

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

Your next question comes from the line of John Lovallo from Bank of America. Please go ahead..

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

The Ceramic business in Mexico is about the same in units as the U.S. business, however, the average selling price is about half. So in -- on a dollar basis beginning the conversion, on the dollar basis, it’s about half to size with about equal amount of unit, out of that..

So that’s the industry..

That’s the industry.

Out of that Mexico is one of the larger exporters into the U.S.; however, over the last two or three years the Mexican market has been growing dramatically and it’s observed a huge amount of capacity in Mexico and is growing -- I don’t can’t even understand how much grown as much as they had, relative to the economy growing in Mexico.

So what’s happening is there has been a construction of the stuff coming up in the United States, because they higher value for in a local markets rather than exporting it to the U.S..

Okay. That’s helpful. And then you’re clearly running at or close to full capacity at many of your plants. Just curious, though.

Similar to other manufacturing businesses, is there an opportunity for you to drive additional volume by doing things like increasing line speeds or adding shifts within existing plants?.

What we said we are at capacity, it means we’ve done, we’ve already running the same seven days a week and wide open and then every business is we have a around here half way there no matter where you’re there is always way to get more out of it, is it but the more of it most cases once you optimize that is a few percent dramatic..

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

Thank you. My question is on WPC LVT.

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

We think that we are building our equipment or we can satisfy any need in the marketplace with various products of different types of different features as we go through. So, I mean we are prepared to compete in all parts of the market providing products that will satisfy all level..

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

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

Your next question comes from the line of Susan Maklari from UBS. Please go ahead..

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

That was a carpet comment..

Okay.

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

Product innovation is the crux of all of our businesses. So further you guess from commodity products the more important innovation is because you’re selling differentiation rather than price and depending upon which business we’re in, we’ve different participations in commodity and the other.

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

Okay. And then it sounds like you have continued to make some pretty nice progress on the working capital side as well.

As we think about 2017 and some of these moving parts coming together, is there more room there that you think you can realize?.

It’s going to be incremental, we continuously try to find what is operating with lower inventories and giving higher service and you continually do those things and that at the same time off setting that, when your near capacity limitations of the working capital becomes lower and then more important is creating more product.

So in some cases we’re giving up turns and order to try to get more throughputs out of the business in the short term..

Your next question comes from the line of Laura Champine from Roe Equity Research. Please go ahead..

Good morning, Jeff. I think you called out weakness in residential carpet.

Is that just a continuation of the secular trend towards hard surfaces? Or was there any change in that deteriorating trend in residential carpet, or any new drivers of that weakness?.

First broader then carpet, residential replacement has not have the same robustness we would have expected, going through the cycle and it’s in all the product categories as you go through.

And addition in the carpet fees, there is increasing pressure from declining prices, as the market growth in polyester, which sells at lower prices, as reduced the prices and then with the over capacities in the carpet industry, the commodity prices have got in compressed even more.

All of those things are reducing the dollar volume of the industry, at the same time there is been the trend to selling more hard surfaces and use of more hard surfaces and more places, which has changed the growth rate of the entire industry, and those dynamics as continuing as they have been, so we’re trying to participate it all the pieces.

We’re trying to make sure that we satisfy the customers from all the different product categories and our goal is to have our profit businesses largest we can have it.

And at the same time to optimize the other hard surface products, which we participate in all the parts of the business, and then going back to what we discussed before, having incremental innovation and everything has a huge benefit and we spend a huge amount of effort, trying to create some reasons that customers prefers ours in every single product category..

Your next question comes from the line of Brandon Rolle from Longbow Research. Please go ahead..

Hi, this is Brandon Rolle on for David MacGregor. My question was in the Flooring North America segment.

You had called out commodities pressure on the same; and how much of that was a drag on the 15% operating margin? Then as a follow-up, I was hoping you could talk about the levels of import competition in the hard surface flooring markets, whether it be LVT, laminate, or wood flooring. Thank you..

The pricing pressure in the commodity carpet business has been going on for some time. There is excess capacity in the marketplace. It has pushed the prices and margins down in the business for us. But I want to remind you at the same time that our North American Flooring business is operating at historically the highest margins it’s ever been at.

So it's just what we have to deal with, is the marketplace. The competition from offshore is there, and it’s different and different product categories. The Ceramic business, there's probably almost half of the industry comes from show somewhere, which includes, the biggest pieces coming from Mexico and China, I would guess, would be the two biggest.

At the same time, the highest stuff is coming out of Europe, is it. In the other product categories, each one is different. The laminate business, there is the significant amount is to come from China and moved to Europe. There is new capacity coming up.

So it’s going to move here, you see the LVT with all coming out of China, but this new capacity coming up is moving to the U.S.

So in these product categories where you can automate it, there's advantages to being local but at the same time in the world marketplace with exchange rates and other pieces, people dump excess capacity into the marketplace.

We think that we’re well suited to compete and in the Ceramic industry and we're actually built, we own different capacity to everyone. We started this year, we’ve actually shift product in Ceramic from Russia, Europe, and Bulgaria and out of our Chinese relationship into the U.S. to support our business..

Your final question comes from the line of Sam Darkatsh from Raymond James. Please go ahead..

Good morning, Jeff, Frank. How are you? A couple questions, one of them is just a follow-up on a prior question, as it relates to your Mexican exposure.

Are you hedged for 2017 for transactional impacts if the peso does devalue after Tuesday?.

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

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

In the peso, what’s happening with probably or gaining and losing about equal amount. So on the imports we gain if it goes down, we gain on what we bring back. But our profits translated back from Mexico go down. If it reverses, the opposite occurs..

Final question, if I could. You’re out of capacity in Russia, and new capacity coming online for Ceramic. Are you in the process of raising prices there? If you mentioned it in your prepared remarks and I missed it, I apologize.

I was just curious if you’re raising prices there?.

No, we are not raising prices there, the market is probably in the depths of recession has been at and forever.

I would guess that there ceramic market in Russia to 30%, 35% most of my competitors are struggling to stay alive the prices are compressed over there and then that environment we have, because we have the premium position install and designed because we have control of the downstream distribution, because we have the brand that’s known in the marketplace were still promoting our brand through advertising across the market place.

We are running opposite to the entire marketplace..

Very helpful. Thank you. Both have a terrific weekend..

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

That concludes today’s conference call. You may now disconnect..