Frank Boykin - CFO Jeff Lorberbaum - CEO Chris Wellborn - COO.

Bob Wetenhall - RBC Capital Stephen Kim - Evercore ISI Mike Dahl - Barclays Susan Maklari - Credit Suisse John Baugh - Stifel Mike Wood - Nomura Instinet John Lovallo - Bank of America Merrill Lynch Sam Eisner - Goldman Sachs Laura Champine - Roe Equity Research Kathryn Thompson - Thompson Research Group Keith Hughes - SunTrust David MacGregor - Longbow Research Stephen East - Wells Fargo Tim Wojs - Baird Eric Bosshard - Cleveland Research.

Presentation:.

Good morning. My name is Craig and I will be your conference operator today. At this time, I would like to welcome everyone to the Mohawk Industries' Third Quarter 2017 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-answer period.

[Operator Instructions] As a reminder, ladies and gentlemen, this conference is being recorded today, Friday, October 27, 2017. Thank you. I would like to introduce Mr. Frank Boykin. Mr. Frank Boykin, you may begin your conference..

Thank you, Craig. 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 2017 and provide guidance for the fourth quarter.

I'd like to remind everyone that our press release and statements that we make during this call may include forward-looking statements, as defined in the Private Securities Litigation Reform Act of 1995, which are subject to various risks and uncertainties, including, but not limited to, those set forth in our press release and our periodic filings with the Securities and Exchange Commission.

This call may include discussion of non-GAAP numbers. You can refer to our Form 8-K and press release in the Investor Information section of our website for a reconciliation of any non-GAAP to GAAP amounts. I'll now turn the call over to Jeff Lorberbaum, Mohawk's Chairman and Chief Executive Officer.

Jeff?.

Thank you, Frank. In the third quarter Mohawk delivered record earnings and EPS were sales growing approximately 7%. Our business outside the United States experienced the strongest revenue growth as economies of those countries expanded. In the period, we overcame rising material cost disruptions from hurricanes and reduced pattern revenues.

Our price in mix continue to improve as we enhanced our product offering with unique designed and differentiated features. To recovery material inflation, we implemented enterprise-wide pricing actions this year. And with productivity and mix we cover a higher cost earlier than we expected this quarter.

Our many operational initiatives and process improvements resulted in significant productivity gains of approximately $49 million and we incurred $8 million of start-up cost in our results.

For the full year, we are investing $900 million to optimize long-term results by entering new product categories, extending our reach into new geographies and facilitating growth in our existing businesses.

These projects include ceramic expansions in Mexico, Russia, Italy and Poland additional premium laminate, engineered wood, rug and polyester carpet capacity in the United States and increased premium laminate capacity in Europe and Russia.

Our investment will satisfy increasing demand for our products as well as introduced state-of-the-art manufacturing technology to further our position as the industry's innovation leader. During 2018, in the United States we will launch production of rigid LVT as well as quartz countertops.

In Europe, we will enter the rigid LVT carpet tile and porcelain countertop business. And in Russia, we will open a manufacturing plant to participate in the large sheet vinyl market. Our strong financial position allows us to aggressively grow through both internal investments and acquisitions.

This year we've completed four acquisitions that broadened our product offering and enhanced our manufacturing advantages. Combined all of these initiatives will allow us to drive our long-term profitability and outperform the market.

With our strong management team and balance sheet, we are well positioned to continue our extraordinary performance of the last five years. In the United States job creation has been solid throughout the year and consumer sentiment remains positive. The U.S.

economy and housing market continues to grow at a more measured pace even with the disruption of September's hurricane. Single family housing starts are growing a multi-family construction is contracting this year. The October National Homebuilders Association showed builder confidence rising to the highest levels since spring.

Remodeling trends are projected remain strong in recovery in Florida and Texas regions, will fuel substantial renovation and rebuilding. The October architectural building index shows positive commercial and institutional building trends in most of the country with a slight softening in the west.

Outside the United States, the international monetary fund has increased this forecast for economic growth in Europe and in Russia through 2018. Now Chris Wellborn, our President and Chief Operating Officer, will provide you an overview of our segments performance during the third quarter..

Thank you, Jeff. Our flooring rest of the world segment had an exceptional quarter with majority of our manufactured product sales and earnings growing dramatically. Our pattern revenue is running at a higher rate than we anticipated due to the broader use of our patterns and increase in worldwide sales of the LVT.

During the period our price increases and mix improvement offset our inflation in currency changes. Third quarter results were also enhanced by a reduction in summer shutdowns allowing us to shift more and customers increased purchased prior to pricing actions in either of which will occur going forward.

Our laminate innovation in proprietary structures and waterproof technologies is increasing the selection of our products by customers who would ordinarily purchase wood flooring. This combined with our broader ray of sophisticated designs is expanding our lead in the premium laminate category.

In this quarter, the start-up of our state-of-the-art laminate equipment will enable us to expand this growing category and broaden our distribution. The utilization of LVT is continuing its rapid acceptance in the marketplace.

We are using the value of our well-known brands to segregate different channels and price points to address all components of the LVT market. Our present European LVT manufacturing is running at capacity and our new plant will begin operating by the end of the year. The new plant will expand our capacity of flexible LVT as well as produced rigid LVT.

As always we will bring new innovations to LVT to differentiate our value proposition in the marketplace. Our process improvements and investments in leading technology continue to reduce our cost, enhancing our position as the LVT market gross and becomes more competitive.

We improved the visuals in the sheet vinyl to offer a value alternative for LVT and we are increasing our participation in the commercial sheet vinyl sector. We are exporting products to Russia they are prepared for our new sheet vinyl plant which will be operational by the end of next year.

We are also expanding the segments commercial sales force to increase the specification of sheet vinyl, LVT and our upcoming corporate tile collections. Our new commercial corporate tile plant should initiate limited production in the fourth quarter.

Our insulation business has improved as we have aligned our pricing with the dramatic inflation of raw materials. Our production is still being limited by material shortages, which we anticipate will be resolved early next year.

If our raw material cost remain elevated it may encourage the substation alternative insulation products that could impact our sales of these products. Sales and margins in our wood panel category have increased as the market strengthens.

In the quarter, our global ceramic segment sales increased 9% as reported and 7% on a constant days in currency basis with the strongest growth in Russia and Mexico as well as in our acquisitions in Italy and Poland which have been integrated with our existing European ceramic business.

The segment's operating income rose 5% as reported and 10% on an adjusted basis driven by improved productivity and volume. New capacity came online during the period with new production in Mexico and our modernized commercial tile plan in Italy. These capacity increases will allow us to more aggressively expand our future sales. Our U.S.

ceramic business was softer than we anticipated due to the impact of hurricanes in two of the country's largest ceramic markets. Though the recovery on these regions has begun we are projecting lower volumes through the end of the year.

As our new ceramic capacity comes up transitioning sales from outsourced products to manufactured products is taking longer than we anticipated, additionally the timing of product changes for some of our large customers was delayed. We anticipate our fourth quarter ceramic sales will improve as we execute more aggressive sales strategies.

We have introduced new porcelain collections with greater durability and patterned its slip resistance highlighting the easy maintenance safety and health benefits of our products. In the third and fourth quarters of this year, we are opening about 15 tile and stone centers in the U.S., at key U.S. markets.

In the period, our manufacturing plants were operating at record levels for volume quality and cost. We continue to expand our countertop sales and distribution significantly increasing our participation in the quartz category just for our upcoming production.

We are reconfiguring a site in Tennessee to install new QUARTZ manufacturing equipment which should begin operations by the end of next year. Our sales and margins in Mexico increased as we broadened our product offering and enlarged our customer base.

We have completed the expansion at our [indiscernible] plant and all the new production lines are presently operating. This additional capacity with capabilities to make larger higher value sizes in ceramic will allow us to expand our sales in the U.S., Mexico and South America.

During the period, our European ceramic business increased dramatically with growth in our local markets and the addition of our Italian and Polish acquisitions. We are implementing many investments across the region to improve our productivity and introduce new product innovation.

The final upgrades at our Italian commercial porcelain plant have been completed and we are expanded our offering to utilize our new operations. We have just completed our major European ceramic trade show where we introduced new collections differentiating each of our brands.

Our new ceramic slab manufacturing is progressing as planned and we are finalizing our large countertop and wall panel collections to enter this new category. We are improving our product offering in the Bulgarian market as we invest a pretty larger sizes and improve our efficiencies.

We have implemented our Italian information system in Bulgaria and we are preparing to deploy the system next year in our recent acquisitions. We have started up the ideal assets at our polish plant and we are installing additional equipment to broaden our position in the Northern and Central European markets.

The Russian economy has bottomed out and the country's GDP has started to grow. The Russian ceramic industry's volume and margins are presently at a cyclical level. Our ceramic business is meaningfully outperforming the industry and we are adding capacity to increase our share as the market expands.

With our premium designs, distribution and network of owned and franchise shops, we are well positioned as the market leader. For the quarter, our flooring North America segment's profitability decreased as reported but increased 11% on an adjusted basis with adjusted margins growing 140 basis points as sales rose 2%.

Our price mix and productivity improved during the period covering increases in material and other inflation. By improving the efficiency of our administrative operations we lowered SG&A as a percentage of sales even as we expanded our sales organization to foster greater engagement with our customers.

Our new product introductions improved our average selling prices and margins and process innovations and investments in manufacturing technology improved our cost. Capacity limitations in laminate, LVT and some residential carpet categories constrained our sales during the period and will be addressed in the fourth quarter.

Additionally, the hurricanes in Texas and Florida interrupted normal purchasing patterns and impacted our sales during the period. After a short-term decline we anticipate increased sales in these regions over the next two years as the affected communities repair [indiscernible].

During the period, our soft surface sales growth exceeded hard surfaces which were constrained by production limitations. Growth in our residential carpet outpaced our commercial sales. In carpet, we announced a 5% to 6% price increase on our products affected end of this year to cover our increasing costs.

With their superior softness and performance attributes, our smart strain collections continued to take market share, expanding our leadership in the premium market. Presently, our new smart strain self reserve and aero introductions are being installed in leading retail stores around the country.

Each of these collections offers a unique differentiating proposition to the consumer. We are increasing the distribution of our luxury care stand brand which provides leading style and design in premium carpet.

Our continuum polyester continues to expand its position as the medium to low-end price points and our soft collections made of recycle materials provided superior alternative in the category.

In commercial, the specialization of our sales force by end market has increased the specification of our products, our award-winning carpet tile collections and squares, rectangles and planks work together to provide designers with unsurpassed options to create unique designs in every commercial space.

We are broadening our offering at mid-price points to provide more sterilized options and increase our share. With new product collections and the expansion of our sales force, we are increasing the non-specified sales of our commercial collections in the retail channel. We have enhanced the productivity of our U.S.

LVT operations and we are expanding our product offering in both residential and commercial categories. We introduced a proprietary rigid LVT collection designed for exceptional stability and durability as we prepare for new U.S. LVT production in the second quarter next year. When the alliance complete, we will be the only U.S.

manufacturer positioned as a competitive alternate to imports that can supply both high quality rigid and flexible LVT. We anticipate that the LVT market will continue to grow at high rates for the foreseeable future. And next year's capacity expansion will extend our position as the largest domestic manufacturer in the category.

Our new laminate production will be operational this quarter and will allow us to expand a successful waterproof laminate that improves on mother nature in both performance and visuals. The increased capacity will allow us to extend the distribution of our new collections and enhance our premium position in the marketplace.

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

Thank you, Chris. Net sales for the quarter were $2.449 billion up 7% over last year, with the legacy business growing 3% on a constant exchange rate basis. We had our strongest growth in the rest of world segment for the quarter.

Our gross margin as reported was 32%, excluding charges the margin was 32.5% and was favorably influenced by $63 million of price mix and $40 million of productivity. These were partially offset by $61 million of input cost inflation as well as lower IP.

SG&A as reported was 16.5% of net sales or 16.3% excluding charges which were slightly better than last year. Productivity of $9 million offset investments back into SG&A of $6 million.

We had unusual charges in the quarter of $17 million which were primarily related to plant consolidation in the flooring the North American segment and acquisitions related to charges in global ceramic. Last year, we had a net benefit of $12 million related to a legal settlement.

Our operating margin excluding charges was 16.2% up slightly over last year. The results were positively impacted by $62 million of price mix and $49 million of productivity offsetting this $61 million of input cost in IP. If we look at income tax, the rate for the quarter was 27.6% that compares to 26.4% last year.

We expect the rate to be 27% to 27.5% in the fourth quarter. In 2018, we expect the full year rate to range between 28.5% and 29.5% as the geographic mix of our earnings shifts to higher tax jurisdictions. Earnings per share excluding charges was $3.75 and increased 7% over last year.

Moving to the segments, in the flooring rest of world segment, sales as reported were $523 million or up 13%. This was an 8% increase on a constant exchange rate basis.

We had an extremely strong growth in most products with volume adding $8 million along with accelerated implementations of price increases as the price mix contributed $29 million to the quarter.

In our operating income margin excluding charges, it came in at 16.2% with price mix of $28 million and productivity of $8 million which helped to mitigate $22 million of input cost inflation as well as IP loss. In the global ceramic segment, sales as reported were $893 million or an increase of 9%.

FX and acquisitions added approximately 8% to growth even with storms product transitions and delayed load ends that we had as headwinds. Operating income margin excluding charges was 16.8% with productivity of $16 million and volume of $8 million covering input cost increases of $10 million.

In the flooring North American segment, sales as reported were [$1.032] [ph] billion up 2% over last year. The storms in capacity limitations were headwinds but price mix of $41 million drove higher sales performance.

Operating income margin excluding charges was 16.7% that was up 140 basis points with $32 million of price mix and $25 million of productivity offsetting $29 million of input cost increases. In the corporate and elimination segment, we had an operating loss of $10 million; we expect $35 million to $40 million of loss for the full year.

We jump to the balance sheet, receivables and debt to quarter at $1.656 billion with days sales outstanding of 58 days. Our inventories ended the quarter to $1.911 million. We had 112 days of inventory on hand with raw material inflation and source product growth impacting the days.

Fixed assets were $4.1 billion with third quarter capital expenditures of $229 million and depreciation and amortization of $114 million. Currently, we are estimating full year CapEx of almost $900 million with an estimated depreciation and amortization of approximately $450 million.

Our total long-term debt was $2.7 billion with leverage at 1.5x debt to EBITDA. I will now turn the call back over to Jeff..

Thank you, Frank. In the fourth quarter we anticipate that the business will improve as we benefit from innovative new products, increased volume and the performance of our recent acquisitions. We expect higher sales with the release of some of our capacity constraints enabling us to expand our market position.

During the period, we will absorb higher start-up cost estimated at $15 million, our results as new operations come online. The destructions caused by the hurricanes in the U.S. should diminish as those markets begin their recovery.

Greater productivity, better product mix and price changes should improve our fourth quarter results overcoming the reductions from our expired patents. Taking all this into account, our EPS guidance for the first quarter is $3.25 to $3.34 excluding any one-time charges.

We are leveraging our strong financial position to invest in the business at record levels expanding our capacity in most categories, broadening our product portfolios and entering new markets. The four acquisitions we have completed are enhancing our results and further our global strategy.

Next year, start-up cost and marketing investments of our new operations will vary quarter-to-quarter, as we expand our business into new products and geographies with many of the benefits in future years as our utilization increases.

Our organization's ability to maximize internal investments and execute acquisitions around the world will deliver greater long-term growth and profitability. We will now be glad to take your questions..

[Operator Instructions] Our first question comes from the line of Bob Wetenhall from RBC Capital..

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Our next question comes from Eric Bosshard from Cleveland Research..

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I'm showing no further questions this time. And I'd like to turn the call back over to Mr. Lorberbaum for closing comments..

Thank you very much for joining us. We think we're well positioned for next year and beyond. We're putting investments in to drive the business and profitability long-term. And we're really interested in the long-term growth and there is going to be more variation quarter-to-quarter with the all the aggressive actions we're taking.

Thank you for joining us..

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