Frank Boykin - CFO & VP of Finance Jeffrey Lorberbaum - Chairman & CEO William Wellborn - President, COO & Director.

Michael Wood - Nomura Securities Justin Speer - Zelman & Associates Stephen Kim - Evercore ISI Michael Rehaut - JPMorgan Chase & Co.

John Baugh - Stifel, Nicolaus & Company Keith Hughes - SunTrust Robinson Humphrey Douglas Clark - Goldman Sachs Group Kathryn Thompson - Thompson Research Group Matthew Bouley - Barclays Bank Michael Dahl - RBC Capital Markets John Lovallo - Bank of America Merrill Lynch Stephen East - Wells Fargo Securities Philip Ng - Jefferies Susan Maklari - Crédit Suisse Eric Bosshard - Cleveland Research Company Laura Champine - Loop Capital Markets David MacGregor - Longbow Research.

Good morning. My name is Katherine, and I will be your conference operator today. At this time, I'd like to welcome everyone to the Mohawk Industries Third Quarter 2018 Earnings Conference Call. [Operator Instructions]. As a reminder, ladies and gentlemen, this conference is being recorded today, Friday, October 26, 2018. Thank you.

I would now like to introduce Mr. Frank Boykin. Mr. Boykin, you may begin your conference..

Thank you, Katherine. 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 2018 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, we generated sales of $2.5 billion, up 4% compared to the prior year. For the period, our adjusted operating income was $314 million or 12.3% of sales with an adjusted EPS of $3.29. In the quarter, start-up costs related to new capital projects were $20 million, in line with our plan.

Our third quarter results fell short of our expectations. Sales growth in all segments was lower than our estimates. Price increases had less impact, and we experienced more inflation than predicted. Transportation costs continued to rise due to limited availability of common carriers and higher fuel prices.

Additional manufacturing reductions were required during the period to control inventory. Our LVT sales were up significantly, but were constrained by internal production.

Our margins were further impacted by a decline in product mix from customers trading down, import competition due to the strengthening dollar and higher volumes in channels which use lower-value products. In the U.S., we continued to execute additional pricing across most product categories to offset ongoing pricing inflationary pressures.

Our LVT sales are expanding from both greater internal production and sourcing programs. We announced price increases on products that we import from China to pass through the new tariffs and other inflation. We are increasing our internal trucking to enhance service to our customers and control costs.

Approximately 40% of our sales are outside the United States, and most of the major markets have experienced weakening. Sales growth in most of our European products slowed from the prior period, along with the economy, and margins were impacted by cost inflation and a weakening product mix.

Though political uncertainty has led to a decline in the Mexican ceramic market, we are increasing our sales with product innovation and expanded distribution. In the period, the acquisition of Godfrey Hirst added revenues of approximately $70 million, even as the Australian market slowed due to lending restrictions and reduced exports to China.

In our non-U.S. businesses, we are increasing prices as conditions permit, introducing innovative products, expanding our distribution and reducing our costs. We have many investments in new products and geographies that are in various stages of completion from presently being constructed to ramping up with limited utilization and lower product mix.

Over time, these projects will progress from starting up with losses to a breakeven position and finally, to achieving our planned margins when sales productivity and product mix are optimized. The combined sales of these potential investments will exceed $1.2 billion and when optimized, should contribute margins similar to our existing businesses.

Some benefits of these projects will be realized next year, but most will occur in 2020 and beyond when operating at anticipated levels. The projects already starting up are rigid LVT and premium laminate in the United States, ceramic in Mexico and rigid LVT, carpet tile, porcelain slabs, technical tile and premium laminate in Europe.

Other projects under construction include quartz countertops in the U.S., porcelain tile in Poland and sheet vinyl premium laminate in Russia. Even as we addressed the current environment, we are positive about the long-term value of these investments and our sales and profitability.

We are confident about Mohawk's position in the global market and our aggressive strategy to deliver long-term profits and returns. Our Board of Directors has approved a new plan to purchase $500 million of our company's stock. With that, I'll turn the call over to Chris to review the segments.

Chris?.

Thank you, Jeff. For the quarter, our Global Ceramic segment sales decreased about 1% as reported to $886 million, with challenges from inflation, pricing pressures and lower growth in most of our markets. Adjusted operating income for the segment was approximately $119 million or 13.4% of sales. During the period, our U.S.

volume expanded, while margins were pressured by price, mix and higher transportation costs. Increased competition from imports due to a strong dollar and the growth of LVT continued to impact the U.S. ceramic industry. We have announced a price increase to recover freight and are taking other actions to improve our mix and margins.

We're expanding our larger-size tiles, increasing our technical porcelain collections and growing our porcelain slab offering. Our patented technology to enhance the durability in slips and falls is being well accepted in both residential and commercial channels.

We're introducing commercial LVT into Dal-Tile's offering, and we are testing a number of new innovations which could be significant, including a patented technology to reduce the time and cost of ceramic installation and a patented porcelain roof tile system.

We are improving our processes to make it faster and easier for customers to place orders and pick up their products. We're enhancing our regional galleries and local showrooms to increase our premium porcelain sales and commercial specifications.

In addition, we have consolidated eight service centers and are improving the efficiency of our administrative and logistics organization. As an alternative to imports, we are increasing our direct sales to larger customers who buy in truckload quantities, enhancing their supply chain.

To improve our inventory turns, we are presently manufacturing fewer units than we are selling, which is negatively impacting our costs. Next year, we anticipate that production levels will increase and approximate our sales level.

Given the changing transportation market, we're revising our distribution strategy to lower our costs by reducing the number of stops we make on each trip. A limited amount of our U.S. ceramic sales is sourced from China, and we are raising prices on these collections to offset recent tariffs.

The imports from China had been the lowest-cost alternative from around the world. Because of this, our competitive tile position will improve as U.S. tariffs rise even as purchases shift to other countries. In quartz countertops, the U.S. has initiated total duties of 44% due to tariffs and Chinese subsidies of these products.

And additional penalties for dumping are expected. During the period, our countertop sales increased 15%, with quartz growing substantially more. Our quartz countertop manufacturing in Tennessee is preparing to start up in the fourth quarter. We have moved our quartz sourcing to countries that are not affected by tariffs.

We should be well positioned to utilize our new quartz production as it ramps up over the next year. Even with the Mexican ceramic market declining this year, our sales have increased as we expanded our distribution and introduced additional innovative products.

We are currently launching our 2019 collections to enhance our share, improve our mix and better utilize our new capacity. We've expanded our commercial sales organization to increase specifications in large projects with designers and end users. We continue to grow the sales for our products in Central and South America.

Next year, our margins should increase in Mexico with better mix and higher volumes as our business expands. On October 15, we executed an agreement to purchase Eliane, one of the largest ceramic tile manufacturers in Brazil for approximately $250 million.

Brazil is the world's third-largest ceramic tile market, where Eliane is a leader in the premium porcelain, with annual sales of about $215 million. We anticipate the acquisition closing in the fourth quarter.

With additional investments from Mohawk, Eliane's strong management team will upgrade manufacturing assets, enhance product offerings and lower cost. Margins at our European ceramic business had been under pressure due to lower industry demand and pricing as well as increased inflation.

To manage this, we've introduced more differentiated collections and expanded our commercial offering to improve our mix. Our commercial sales are expanding as we open new design centers and increase our specifications with a more direct sales strategy.

In residential, we are increasing our larger-size offerings in porcelain slabs as well as introducing decorative small sizes and unique thin wall tile. We are realigning our sales force by market and channel to optimize our position in each segment. To broaden our distribution, we are offering exclusive programs for our large retailers.

We are gaining traction with our new large slabs that were used in countertops, walls and floors. These slabs have industry-leading visuals and are easier to install than existing alternatives. In Bulgaria, we are enhancing our mix with larger sizes and moving into a new warehouse to improve our service and distribution cost.

We are transitioning production of lower-value ceramic from Italy to our Polish and Bulgarian operations to improve our competitive position. We are increasing our productivity and reengineering our material formulations to lower our manufacturing cost.

In the fourth quarter, we will decrease our production levels to align our sales and inventories for next year. In our Russian ceramic business, sales and volume improved but were partially offset by higher inflation. We have announced price increases of 4% to recover material and labor increases and the impact of a weaker ruble.

In the period, our growth has been limited by our capacity, which we are increasing. We are expanding our design centers in major markets to increase our retail position and commercial specifications. Our differentiated products, commercial sales organization and national distribution have made us the leader in the premium commercial channel.

In the third quarter, our Flooring North America segment sales were approximately $1 billion, increasing about 2%, with an adjusted margin of 9.9%, including start-up cost of $9 million.

Sales and volume did not improve as we had anticipated, and mix declined from growth in polyester carpets, customers trading down and higher sales in lower-value channels. Our realized price increases have taken longer to implement and were lower than we anticipated in the quarter.

We're seeing a greater impact from our price increases as we enter the fourth quarter. In the quarter, production on our new LVT line was lower than anticipated, but recent improvements have increased output more than 30%. Due to all of these factors, it will take longer than anticipated for our margins to improve.

We have announced additional carpet price increases for the end of the fourth quarter to offset further material increases from rising oil and chemical prices. Given this extraordinary inflation, we are enhancing our processes to manage pricing and ensure a more consistent execution.

Our new home construction in multifamily channels had the strongest performance during the period, and LVT continued to capture a greater share of the flooring market. We anticipate continued growth in LVT as our product offering expands, both with greater local production and sourced products. To better align our new European and U.S.

LVT start-ups, the U.S. operation is now reporting to our European vinyl management, and we have transferred an experienced manager from Belgium to lead our U.S. operations. After initiating these changes, we are already seeing significant improvements in the processes and volume of our LVT production.

In the U.S., we have successfully produced rigid LVT, which we'll begin introducing into the market. Our proprietary SmartStrand Silk Reserve and patented Air.O soft flooring and luxury Karastan collections are continuing to gain share of the premium market.

Our waterproof RevWood flooring is gaining share in the retail, builder and home center channels with their superior visuals and performance features. Our consolidated residential sales management now coordinates all retail products, making it easier for customers to satisfy all of their needs with Mohawk.

Our commercial sales improved as we progressed through the quarter, with hard surface sales significantly outpacing carpet. Our education, government and main street channels outperformed during the period. We're expanding our specialized sales forces to enhance our penetration in all channels.

In the period, our sales backlog increased as we expanded the specifications for our innovative new offerings. We are consolidating multiple warehouses and closing two higher-cost manufacturing options - operations to improve our efficiencies.

Our Flooring Rest of the World segment delivered third quarter sales of $612 million, an increase of 17% as reported or 19% on a constant currency basis. Adjusted margin for the segment was 15.8% of sales, including start-up cost of $8 million. As we moved through the quarter, overall market conditions softened.

Our segment sales rose substantially with the recent acquisition of Godfrey Hirst. The segment's legacy growth was 4.6%, slowing from the second quarter's very strong results. In operating income, our higher sales and product mix improvements during the period were partially offset by currency headwinds and higher start-up costs.

During the period, LVT led the segment's growth, along with insulation and wood panels. We are increasing prices in product categories impacted by inflation and currency headwinds. Our LVT sales grew significantly, even though our new LVT production was constrained as we started up our new line.

Engineering solutions have been implemented on the new line, and daily output has risen about 30%. We anticipate continuing incremental improvements throughout 2019 until we match the performance levels of our existing LVT lines. We do not expect to fully load the plant at the optimum mix in 2019.

We are producing additional rigid LVT collections to broaden our offering and enhance our market position. These new products feature state-of-the-art realism, dimensional stability and noise suppression. In laminate, our patented waterproof technology, combined with our unique surface textures, are enhancing our mix.

The differentiated features and benefits we offer command a significant premium in the market. With our new Belgium production line, we are expanding the offering of these products. In Russia, a similar laminate production line is starting up, and we're introducing the same features to expand our distribution and capture greater share.

Our European sheet vinyl business is operating at capacity, as we bring to market innovative residential and commercial products with easier installation methods. We have announced price increases of 4% to 7% to cover cost inflation. Our new Russian sheet vinyl plant will start up by the end of the year and provide more product to sell in Europe.

Our new carpet tile plant is ramping up production, and we're expanding sales by increasing our sales force and customer base as we bring greater styling and value to the market. Our wood panels business continues to show strong results, driven by price increases and improved mix.

Our manufacturing productivity has improved from investments we've made in our facilities. In the insulation business, demand for our products is increasing as material costs fall back to more normal levels. In both Australia and New Zealand, the integration of Godfrey Hirst is well under way.

The Australian housing market has weakened because of stricter lending standards, higher mortgage rates and slowing exports to China. SG&A efficiencies are being created as we merge Godfrey Hirst's operations with our local Mohawk distribution businesses.

We added new carpet tile capabilities to expand our commercial business in both markets, and we've started supplying raw materials from the U.S. to broaden our product offering and reduce cost. Operational best practices are creating new ideas to improve both our U.S. and Australian operations.

I'll now turn the call over to Frank, who will cover our financial performance for the third quarter..

Thank you, Chris. Starting with the income statement. Sales for the quarter were $2,546,000,000, growing 4% as reported, with our legacy business at 2% on a constant basis. Our Flooring Rest of the World segment had the strongest growth during the quarter. Gross margin as reported was 28.3% or 29%, excluding charges, and was down from 32.5% last year.

Inflation of $63 million, higher start-up cost of $10 million, FX headwinds of $9 million and plant shutdowns of another $9 million offset increased volume of $29 million and productivity gains of $5 million. SG&A as reported was $433 million or 17% of sales. Excluding charges, it was 16.6% of sales and compares to 16.3% last year.

Unusual charges during the quarter were $27 million and primarily were related to the Godfrey Hirst acquisition and plant consolidation. Our operating income, excluding charges, was $314 million or 12.3% of sales. That was down from 16.2% last year. Negative mix offset our price increases, and inflation of $69 million was a drag in the quarter.

Higher volume of $17 million was offset by start-up costs of $14 million, FX of $6 million and $9 million for plant shutdowns. Our third quarter adjusted EBITDA was $445 million, and we estimate full year to be about $1.7 billion. The income tax rate improved to 18.8% from 27.6%, as the 2017 U.S. tax reform drove the overall rate down.

We estimate a fourth quarter rate of 19%, and in 2019, a full year rate of 22%. Earnings per share, excluding charges, was $3.29, a decrease of 12% compared to the prior year. Turning to the segments. Global Ceramic had sales of $886 million, down 1% as reported, with our legacy business up 1% on a constant FX basis.

Our Russian business reported the strongest growth in this segment. Operating income, excluding charges, was $119 million, with a margin of 13.4%, down from 16.8% last year. Inflation of $29 million and declining price and mix of $8 million was offset by $15 million of incremental productivity.

In the Flooring North American segment, sales were $1,048,000,000, up 2% over last year. We had our strongest growth in LVT, which impacted most other product categories. Operating income, excluding charges, was $104 million, with 9.9% margin compared to 16.7% last year.

Lower mix offset price increases with negative productivity of $24 million and inflation of $36 million, influencing our results. Productivity was impacted by lower manufacturing and efficiency levels and higher depreciation, employee cost and SG&A. Incremental start-up costs were $8 million.

In the Flooring Rest of the World segment, sales were $612 million, up 17% over last year, with the business up 5% on a constant FX legacy basis. Operating income, excluding charges, was $97 million, with a margin of 15.8%, which was slightly less than 16.2% last year.

Increased volume of $9 million and productivity of another $9 million, along with $6 million of higher price and mix, offset inflation of $4 million. Incremental start-up costs were $5 million during the quarter. In the corporate and eliminations segment, the operating loss, excluding charges, was $5 million.

We expect the corporate expense to range from $30 million to $35 million for the full year. Then jumping to the balance sheet. Our receivables ended the quarter at $1,756,000,000, with DSO of 59 days in the third quarter. Inventories were $2,214,000,000. Inventory days ended at 118, which improved from 119 days in the fourth quarter of 2017.

Inflation and backwards integration negatively impacted the calculations. Fixed assets were $4,586,000,000 and included capital expenditures of $145 million and depreciation and amortization of $133 million in the third quarter.

We are estimating capital expenditures for the full year of 2018 to be $800 million, and depreciation and amortization is estimated at $520 million for the year. Next year, we estimate capital expenditures to range from $550 million to $570 million, and we anticipate D&A to be $570 million. We look at our long-term debt.

Our balance sheet and cash flow remain strong. We had total debt of $2.9 billion, with our leverage at 1.5x debt to total EBITDA. We expect free cash flow of $450 million for the full year of 2018. And with that, I'll turn it back over to Jeff..

Thank you, Frank. We anticipate fourth quarter results continuing the soft trends we experienced in the third quarter. We expect sales to be slightly slower than the prior quarter in most markets and product categories. Even with price increases across the company, we will not offset inflation, and our results will remain under pressure.

Our margins are being impacted by more competitive environments, declining product mix and lower manufacturing rates. We're introducing new products and executing cost reductions to improve our performance. In the U.S., we are expanding our internal transportation and optimizing our distribution.

The Godfrey Hirst acquisition will benefit our results as we integrate our Australian and New Zealand businesses. Taking all this into account, our EPS guidance for the fourth quarter is $2.45 to $2.60, excluding any onetime charges. Based on this estimate, our EBITDA for 2018 will be approximately $1.7 billion.

In the first quarter of 2019, we expect some improvement from the fourth quarter, with operating income of $225 million to $250 million. Presently softening market conditions, significant inflation and declining product mix are hurting our results.

LVT has an opportunity to expand while also impacting the volume, mix and pricing of our other products in the United States. We're reacting to a stronger dollar, which has compressed our margins. Going forward, our results should improve as we align pricing and enhance our product offering.

Our new investments are on track with construction start-up and acquisition of customers and will provide profitable returns when optimized. We will continue acquiring premier companies like Eliane to expand our offering and geographic presence. Mohawk is the largest flooring company in the world, with low-cost positions in our products.

Mohawk's operational depth, innovative products and strong balance sheet provide competitive advantages to create long-term value. With that, we'll now be glad to take your questions..

[Operator Instructions]. Your first question comes from the line of Michael Wood with Nomura Instinet..

Jeff, I wanted to start with getting your opinion on a very high-level argument. As we sit here today, it looks like 2017 was really as good as it gets with high profit margins because of an ideal portfolio mix and pricing power and stable input costs.

And now we're in an era of these increased import competition, cost inflation and excess capacity and perhaps declining flooring demand outside of LVT.

So what's your perspective on that argument? Why - is it wrong? And are you managing the business to that "best days are behind us" philosophy?.

We're going through temporary conditions where you have inflation and the dollar strength and the market conditions, as you said, are negatively impacting it. It has taken us longer to align our pricing with the cost structures than we had expected, and we're adjusting those as we can with price increases everywhere.

I think, as we look forward, it will take us this next year to adjust to it. But I think we're putting the right things in place to expand our business.

We haven't got the benefit of all these investments we've been putting in, in different categories which, when we get the volume up to a certain level with the right product mix, will significantly enhance our long-term profits.

We believe that the profitability of the existing businesses will improve over time and get back closer to where they were..

Okay. And then maybe a specific question. The $24 million productivity - negative $24 million productivity in Flooring North America. I'm assuming that's a net productivity.

Is that correct? And what do you think the normal Flooring North America run rate productivity can be when growth stabilizes? And I'm curious on what it'll look like when you begin to lap the heavy destocking period in 2Q to 4Q 2019..

So productivity was impacted by lower manufacturing levels and efficiencies, higher employee costs, depreciation, higher SG&A and even some uncovered freight, among others. In the productivity, anything that gets worse ends up in the productivity category. We think it'll continue to lag in the near term, but we expect it to improve over time..

Your next question comes from the line of Justin Speer with Zelman & Associates..

I just - unpacking that fourth quarter guidance a little bit more and in thinking about the big - particularly in the third quarter, this productivity line. I think most - and I think you were looking for that to improve from the $3 million drag in the second quarter.

And then you look to the fourth quarter, the guidance implies about 500 basis points plus of margin degradation year-over-year across the business.

So I guess, unpack that Flooring North America piece, how much of that is that productivity continuing into the fourth quarter? And then maybe what's your implied margin guidance across the rest of your businesses? Because it seems we need some handholding around how you're going to exit the year and how to shape that as we think about next year in terms of the margin profile and your math as best you can provide it..

We anticipate continuous soft trends as we go into the fourth quarter, with sales slightly slower. We are continuing to assume that the price increases will lag our raw material inflation. In various markets, as - such as in the U.S., as the markets have slowed somewhat, we're seeing more competitive environments.

We have declining product mix, and we're assuming lower manufacturing rates all the way through. With this, we're increasing prices further in almost every product and marketplace. We're putting out new products that'll have higher margins, and we're executing cost reductions to improve where we are. But it will take time to change the margin..

So in thinking about the price - so we have tariffs rolling in, we have productivity drag - or you have productivity drag, particularly in Flooring North America, that should continue into at least the next couple of quarters.

Thinking about getting price, how are you going to be getting price in a down volume environment and then maybe couch that with what you're seeing with tariffs? How, maybe, much price you're going to be requiring to get versus maybe your competition across your businesses?.

The costs in most of our product categories demand that we increase the prices. And we believe, from the announcements of the other competitors, that there's increases going on in those.

The tariffs are - have limited impact so far, but there are increases in Chinese imports announced by others in the marketplace, which should help us implement a price increase in ceramic at the end of the year. The tariffs could rise to the 25% level in January.

We think there's a reasonable probability they'll go in because we don't see the countries reaching a rational compromise. So as those occur, they should help improve our manufacturing positions in addition..

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

So in addition to some of the longer-term questions that obviously people are going to want some handholding on. I guess, one of the aspects that I wanted to zero in on your term was the inventory dynamic. I think you had indicated that you think that sales would be a little lower in the 4Q.

I wanted to clarify, did you mean down year-over-year? And I assume you mean down like low single digits year-over-year in 4Q. And then on - but within inventory specifically, I was hoping that you could help us understand or break down what we see in the overall inventory number because it still seems kind of high.

In other words, are there big pieces, like was there a buildup of LVT ahead of some launches? Was there - is there any kind of acquisition impact from that inventory that you can break out for us? Or can you break out the inventory build internationally, let's say, versus domestically.

Anything that you can give us regarding the inventory and the likelihood that, that will come down relatively quickly would be very helpful..

First, Steve, I just wanted to clarify. You had said sales would be down in the fourth quarter. Is that what you said? Was that....

I thought that was what Jeff had just said, but clarify me if it's wrong..

No. No, we don't expect sales....

I said sales would be softer. But what's happening is we are cutting back on the production of the piece because at the third quarter, we started cutting back. And we're assuming it's going to be softer going into next year. So we're being more aggressive in the production rates going into the end of the year. Let me get some of it.

And Frank, you can fill in the rest. What I'm saying also is that with the raw material inflation, you have the raw materials hitting the balance sheet before the sales prices have gone up.

So the inventory turns get worse because the raw materials have increased, and it's showing up in the inventory dollars, in addition to having nothing to do with the units as the prices go up..

Stephen, I would just add that we're increasing some of the source materials, like an quartz, for example, and we're taking down our manufactured inventories..

And that was a long question.

Did we leave something out there, Steve?.

Well, in particular, I'm looking for some numbers, either ratios or something that can give us a sense for what we can - how - because that's ultimately what I think The Street needs, is some confidence around your 4Q and 1Q guidance because we're starting to establish a scary pattern here, where we're sort of getting disappointments on guidance.

And so one of the key aspects is your inventory issues - your inventory seems to be continuing to build even though that's something which I know you've been trying to address.

So we just want to get a sense of are you being conservative enough in your sales expectation in 4Q and 1Q? And why do we feel confident that the inventory build is going to turn the other way and, therefore, not create all these other problems in 1Q? So it would be helpful if we could get some numbers around what the inventory build looks like, let's say, in the U.S., for example, or breakout pieces that were sort of not part of the regular flow..

The inventories are expected to go down in the fourth quarter. And we would expect to continue to see improvement in our inventory turns as we move to the next year..

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

First, just a question on the $1.2 billion of sales that you expect from all your different new investments over the next year or two. I just wanted to get a sense, the $1.2 billion numbers seems to be a little bit lower than the $1.4 billion, I believe, that you've talked to in the last year or 2.

I just want to understand what - if that's correct, what the difference is there.

And also, from a timing perspective, how are you thinking about that $1.2 billion fully coming online and "being optimized" so that you can generate margins similar to the business? Would that - is that more of a 2020, 2021 event? Any thoughts around when do you think those investments could get up to full strength would be helpful..

Okay. The difference in the numbers comes from two places. Some of the projects, we have moved out of this additional piece and into the other. We've been talking about this for about two years, so as some of the projects have been moved over. The second is the stronger dollar has impacted the translations of the sales back into U.S.

dollars as the dollar has strengthened, is it - so that's the difference in the two. All of the projects are in all kinds of different states. In the remarks we sort of talked through, there are certain ones that are along in the process. There's other ones that are just getting started as you go through.

They're all in various stages of completion and ramping up. Then with each of the investments, it depends on the cost of starting and stopping it. In some cases, we go out and sell it at lower margins to try to get the volume going through it, which doesn't help the profitability, but it gets the thing started up faster.

In other cases, if the costs are lower, we will ramp it up as we put the sales on in each other. So in all the cases, they go through the stage where you're first underutilized and the mix is poor. Then they get to a point where there's enough volume going through it that they move from a loss to a breakeven, give or take.

And then it usually takes at least a year to get the volume up where you want. And then the next year, we start working on the mix between the two. So it takes periods of going through them depending upon - they're all in different spots a little bit as we start. Some haven't even gotten finished coming out of the ground yet.

The new quartz plant in Tennessee, which is going to get helped by all the tariffs that are going on and countertops, the tariffs are for Chinese assisting their suppliers. And there could be future dumping charges on top if they're already up high. That should help us fill up the plant faster, for instance.

But all the projects have to go through this process, which is - it takes several years to get them to the optimized point..

Jeff, I appreciate the color there. Second question, just maybe a couple of points of clarification, again, on forward guidance.

In terms of 4Q, when you say the sales slightly slower than the previous quarter, do you mean sales less going down sequentially? But should we still expect sales growth up sales growth year-over-year just - but you're talking about sales declining sequentially? And then in terms of first quarter, with the operating income guidance, does that reflect any of the pricing that you're talking about, trying to set in motion with the additional price increases as you try and offset some of the headwinds?.

So the sales, we meant that the sales rate relative to the third quarter would be lower because we're seeing softening trends in many of the markets as we go through.

Is it - and then what was the rest of the question?.

Rest of the question?.

What's the other part? I forgot..

I think he's gone..

Your next question comes from the line of John Baugh with Stifel..

I was curious on the guide on Q1 improving. I think it was an EBIT guide.

Are you saying that the Q1 EBIT will be above Q4 EBIT?.

The guidance, I think, was saying that the decrease in - relative to the prior year would improve over the fourth quarter..

Okay.

So that's not saying EBIT in Q1 will be higher than EBIT in Q4?.

Q1 is always a much lower volume than the fourth quarter, and I don't think we're going to change that..

Okay. Jeff, on LVT and in pricing, I'm curious as to what you're doing, what you're seeing your competition do currently. We've got the 10% in place. And then you've got to contemplate if you're importing the stuff, the 25% at this even as early as now.

Do you think if we see materially higher LVT pricing as we go into next year that, that will slow down the rate of growth of that product or not? And I'm curious as to how you think about that and then how that may or may not impact the rest of your business in the U.S..

The tariffs, it takes a while for the marketplace to adjust to the changes. And in the marketplace, some people have raised it already. I'm not sure all have at this point because of some inventory pieces, but I think most are going up.

If the tariffs go up to 25%, you're going to change the value relationship of it versus other products in the marketplace. And it should have an impact on its use in the marketplace relative to where it is and should change the growth rate and change the alternatives for it. And people may start using other things more. But we'll have to see.

But again, it won't happen like a light switch. It's going to have to change over time..

Okay. And I was curious, Jeff, on the ceramic installation patent that, I believe, you discussed in your release. What - is there any way to - what is it? What are you doing? How revolutionary is it? And maybe your ceramic install cost X per square foot, this process would cost Y per square foot.

Some kind of reference to what it is you're doing there..

It hasn't hit the market yet. We've been testing it for a period of time. It looks like it's going to work. We have a small production starting up that we're starting ready to introduce it. What it does is when you put in ceramic, it usually takes at least two days to prep the floor, put it in and go to different stages to get the job done.

This will cut the time in half by at least half, and you can get the whole job done in a day that would take you two days. Is it - and so the product's going to cost more, but the total install cost should be a benefit and it should cut the time significantly.

So we think it has an opportunity to make the industry more competitive and make it easier to train people to install it. And we're on the initial stages of it today, but we think it's going to help the industry be more competitive..

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

A question on inventory and production rates. On the inventory, it was up about 16% year-over-year.

Can you kind of separate how much of that was units and how much of that was from the inflating raw materials? And then, I guess, as we look at production rates in your current planning, I assume it's worse - I assume it's lower in the fourth than the third.

What are you looking to begin the year? Does that flatten out in the first quarter?.

We don't have the units and volume here to give you. The fourth period will be significantly higher than the third quarter going into it and in multiple markets and product categories, as I said, as we go into next year with a lower expectation of the volume. And I forgot the last part of your question..

Sorry, so you're saying production - you're lowering your production capacity?.

We're lowering the production below the selling rates in the third quarter. And then I'm hesitating a little bit, the first quarter is always a slower quarter, so it's typically - we don't run as hard in the first quarter, in general, just because it's always lower..

When I say in the fourth quarter, it will be a slower production period than the third, correct?.

Yes. In the United States, we have been running the ceramic underneath the sales rate for a period of time, lowering the inventories in it. But - and come next year, we expect to run the rates aligned with our selling..

Your next question comes from the line of Doug Clark with the Goldman Sachs..

The first one is on the U.S. LVT facility and then actually the new European one as well. How loaded are those at those - at this point? I know you mentioned that 30% increase in the capacity, but I guess, I'm just circling a little bit because I don't know what that base is off of ultimately.

So where are we in getting that fully ramped up and utilized?.

You're dealing with a process that has never been run before and going through. So it's - what happens is you start up the plant running at slow speeds with very simple products. And then over time, you keep speeding it up and you keep adding new products to it.

It's not unusual as you go to each incremental stage that something that worked at a slower speed or with less things going on, that things don't work as they're supposed to. And you have to adjust things.

What we had in the quarter, we had both software problems, that the software as we tried to speed it up and make it work, the software was not talking to itself properly, and we also had physical mechanical failures where things broke and we had to replace them. These are normal things as we go through.

What we believe is that we'll keep going through these incremental changes all through next year and by the end of next year, the production lines should be operating at the capabilities that we expect. Even with that, you're still increasing the market, and you're still adding product to it.

So I don't know if - as these things incrementally pick up, it takes time to balance the increased speeds with an increased output with the sales. So you're adjusting the sales strategies. And then typically, you're also - the product mix, when you start, is lower.

And we probably will be working more on the product mix in 2020, as it - as you've gotten it settled down and you're putting higher-value products, the product mix will change, So you won't - we won't get the full benefit until sometime in 2020..

All right. That was super helpful.

And then just in terms of the 1Q guide, I was curious, number one, does that include the acquisition Eliane? And then also, does that include the 25% tariff and the costs potentially associated with the source product on that?.

It does not include the accretion from Eliane..

And it doesn't include anything for the tariffs since we're not sure that - what's going to happen. And then if the tariffs are put in, again, it's not going to happen overnight. The market just isn't going to flip from one to something else in 1.5 minutes..

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

First, focusing on margins and understanding there have been a lot of puts and takes, the margin impact in the quarter by reporting segment and by geography. But first, focusing on Flooring North America. We just had the widest and most consistent step-down in adjusted profit margin in 28 this year.

So stepping back and looking at the force for the fees, how much of the Q3 and the year-to-date impact is driven by investments or plant start-up, inflation, lower volumes or the other - the other headwinds that you've laid out in the prepared commentary.

And really the spirit of the question is to understand what are the internal issues of the controllables versus external and how these can be managed more effectively going forward..

Kathryn, the two largest headwinds in the third quarter for the North American segment were, like I mentioned, $35 million of inflation and then the negative productivity of $23 million. We had shutdowns that hit the P&L for about $4 million, and then we had incremental start-ups that hit us for about $8 million.

But the two largest were productivity and inflation. And we're - as Jeff said, we are putting in a fourth price increase at the end of this year to help continue to offset inflation, introducing new products to help with mix..

The mix has been a significant piece as the - our sales have traded down from higher-value, more differentiated products with higher margins to lower-margin products as some of our customer base tries to hold price points in the marketplace.

And then the other part of it is we have sold more in lower-value categories, so our sales in multifamily and builder, which is lower-value products at lower margins, has increased relative to the total versus the remodeling business on the other side, is it, which is the LVT's impacted the remodeling business at a greater amount..

Before I move to my follow-up question, just to clarify, it sounds like these are more - the majority are more internal-focused and fixable versus external.

Is that a - would that be a fair statement?.

We've still got the pricing and the mix that we've got to address, and some of that has external influences..

It's a combination of both..

Yes. Just on ceramic, how much of trading down on products, in terms of that mix that you talked about, is being impacted by large home builders shifting from ceramic product to lower-priced LBT.

And do you see this as a trend going forward? And any thoughts you have about that shutdown from a mix shift for ceramic to LBT?.

The margin on ceramic is impacted by LBT and the pricing. But it's also being impacted by our mix, we're selling more into the builder channel, for example. And the other thing that's impacting our margin is higher freight cost which we've not been able to recover in pricing.

We are taking a price increase in the fourth quarter that should help us a lot..

So part of it is that we are taking a larger share of lower-value products as the ceramic industry has slowed down. So that's part of the mix shift. And then this freight piece that he talks about, the freight part we sell ceramic all landed. And we haven't recovered the freight.

But we think with the tariffs and pieces, it offers us an opportunity to recover part of the cost..

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

So on the price side, Jeff, you've generally been successful in mostly offsetting inflation historically.

So could you just elaborate on what is different this time? Why is there seemingly limited ability to improve pricing here? Is it really that mix is just a full offset or - I mean, ultimately, what visibility do you have to getting traction on the pricing side?.

Two things. One is on the carpet side, the amount of it and the frequency of it has made it difficult to continue to get them through there. It's made it harder to read the competition and to react in the marketplace as we go through. And then they all don't go in on day one, they flow in overtime as you go through.

So all those things have made it more difficult than usual. And because of the amount of changeover time, it's increasing the amount of trading down to lower-priced products to keep the price point which is also affecting the mix, which is offsetting a lot of the price increase. On the ceramic side, the biggest impact is this cost of freight.

It is heavy and you move it, and the U.S. freight rates have been going up dramatically. And with the dollar strengthening, we haven't been able to recover all of the pricing. But we think we're going to get more of it in the fourth quarter than we have all year. And at the same time, we've talked about the same thing going on with mix.

As the volume has been impacted in the United States, we're selling more lower-value products, all of which end up impacting the margins. And it all looks like price, but it's not all exactly price..

Okay. Second question just on productivity in North America. Jeff, you made the comment that several items, obviously, end up in North American productivity.

So I mean, is the suggestion that really you need to see a volume recovery there to kind of see that swing around? I guess, in other words, I mean, what would be the right way to think about the level of volumes you would need to return to generating productivity in that segment?.

The productivity is impacted by the unit volumes, but there are also other inefficiencies of things going on as we go through. We talked about even some of the freight charges end up in productivity. If they're not billed to the customer, they end up as a difference in last year versus of this year internal cost, which ends up in productivity.

So I think the productivity will improve over time, but it's not going to improve tomorrow..

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

The first question goes back to the topic of kind of a trade-down effect in pricing. I guess, I'm curious, just the pricing has been consistently met over the last couple of quarters, at least with this trade-down effect.

As you're thinking about kind of customer behavior and what you're hearing back from the customer, what gives you the confidence that this will improve as you look at your 2019 pricing actions? And ultimately, the second part of this is, you've talked about slower growth, but do you expect organic growth to be positive in '19?.

We expect to get more price increase in all the different product categories, and every dollar we get helps improve the margins and offset the raw materials that we have. So we're expecting that to better align as we go through. We're taking actions with the new products to put out products that have higher margins, which should help it.

But selling lower-value categories will continue in the piece from where it is today. I don't see that changing as we try to operate the business and get whatever share we can in the marketplace as we go through..

2019 sales growth..

We expect it to be up..

Okay. And I guess it....

One more thing. Part of the up to though, with the margins, all these new pieces we talk - I've gone over a few times of how they go. So in some cases, the volume's going to go up, but the margin's going to lag until the plants hit the cost structures they need and the mix..

Well, that's my second question, Jeff. Because if you look at the 1Q guide, your operating income down about $60 million year-on-year. You've made those comments consistently through the call about this is still going to be a transition year. 2020 is the optimization year.

And so if you think about that where you're positioned after 1Q, again to try to put a finer point on things, do you expect operating income to improve in 2019 versus 2018 in dollar terms?.

The business - I think what we try to put forward is that the business will continue to be pressured next year, that the prices will not cover all the mix, inflation and pressures that we've been talking about. That - we have said that the income in the first quarter will be down.

Over time, we expect the pricing mix and inflation to be better aligned. But the industry pressures across the market would have to improve for us to exceed 2018 earnings next year..

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

The first one on the CapEx guide for 2019 of 550 to 570. That's a pretty good step-down, kind of brings you back to 2014, 2015 levels. Now I realize that the past couple of years have been elevated given some of the spend.

But are you guys delaying any spending in 2019, given what you're seeing in the market?.

First is a portion of that is still paying for those new investments. Even though the equipment's put in, typically, you pay for it in some time to make sure it does like it's supposed to. So there's lags in the investments.

So it could be 20% or more of next year's budget's paying for the stuff that's going in, in the third and fourth quarter of this year. So the ongoing pieces, you have to take those out. And then if you look at the other parts, almost all the investments were very little going into increasing capacity anywhere is going into improving efficiencies.

And then you have the normal maintenance and things you have to invest in as a typical thing. But that's the big chunk, so....

Okay. And then next question is just on your - the $500 million of repurchase authorization put in place.

How quickly can you guys get in the market? And how aggressive do you intend to be given where the stock is?.

We think the stock is undervalued, and we - the window opens on Monday. And we plan to be in the market, purchasing stock..

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

The first question. I guess if you look at your major product categories, how much are raw materials roughly up year-over-year? And then here in late October, I know you're still seeing raw materials go up.

But if inflation stopped today on those major products, how long would it take you all, do you think, to get flush with your pricing versus how much raw materials have gone up?.

If inflation stopped today, I would hope that we would get most of the increases through in the first quarter and be more aligned. But some of the things are at different levels than they were. You got - I got to keep putting apart, one's inflation and one is this change in the channel mix and change in the product mix that we're doing.

So as we go through the market, we are changing - the average value of the products is lower and the average margin on the lower mix is lower. So it's a combination of both. The mix won't change even if we could magically get rid of the inflation today, which is causing the compression..

Yes, sure. I appreciate that. And then the other thing I had is sort of a compound question. If you look at the U.S.

end markets, are you seeing - could you sort of give us an idea of which ones are behaving the worst, which one's behaving the best? And then if you look at your cap utilization rates right now of your major product categories, however you want to answer it, whether it's at what level are you running today, or how much below a normalized level, like maybe earlier this year you're running - just so we can have some magnitude of what type of capacity flexibility you may have as we go through '19..

You guys are asking the questions so long, by the time I get to the end, I get confused what the questions were..

Exactly. The first one's the U.S.

end markets, what are you seeing?.

Okay. The U.S. markets, what's happened is that a large part of the remodeling business is being impacted more, so the retail remodeling business, there's more pressure on the other products as LVT takes a bigger share, in that one versus the others. So you're seeing less of it in the new construction and the multifamily.

But it's there, but it's not at the same levels as that one. So that's probably about what's happening with the channels.

And the second half was?.

The second half, just looking at your major products, where your capped utilization rates are right now and trying to understand how much flexibility and expansion you may have as you go into '19, ignoring your CapEx that you're putting in place.

Just really trying to understand how much you've had to pull back from, say, where you were earlier this year..

I mean, all the different product categories, if you say LVT took 100% of the industry growth, and everything else is about even. And then we're seeing lower unit volumes in most of them. So all of them are being cut back everywhere.

And that's where you see us moving into lower-value products, which we might not have taken as much of in prior years or period, that's compressing the mix, and they're all interrelated..

Steve, in some cases, like ceramic, we're taking down in the fourth quarter, both in the U.S. and Italy because it's the most economical time to take out inventories for us..

You can't start and stop those. You have to stop them for a significant periods of time. So we're stopping and going into the fourth quarter even more..

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

Can you provide some color how to think about some of these start-up costs for '19 versus '18 and the cadence of that? And how we should think about productivity for next year, assuming you're done drawn down production? Because as you kind of highlighted, you still have a handful of projects that are coming up late this year, early next year..

Start-up costs will be down significantly next year. It could be down as much as 50% from what it ran for the full year this year..

Can you give him an estimate for next year?.

No, I think, this year, as we said, it's going 65 to 70, so it could be half of that next year..

And what about on the other productivity targets? Do you have a good handle on that?.

I think the best we can say right now is it should improve as we go through the year, particularly once we get out of the first quarter..

Got it. And Jeff, I just want to confirm I heard you correctly. So you're expecting organic growth to be up next year.

But given some of these headwinds you called out you're seeing in the market, a couple of price costs, you're expecting legacy EBITDA and legacy EBITDA margins to be down year-over-year in 2019 until most things kind of inflect from here?.

You have this mix change that I keep talking about, about selling more lower-value products, which is impacting the margins. And that's going to continue for the foreseeable future. On the other hand, we do expect to get the pricing more aligned than it has been. So that's going to help. And then the industry will have to see where it goes.

I'm still assuming the industry's going to be up next year..

Okay.

Are you planning to roll out any bigger initiatives to take out more costs, ratchet head count and just potentially even push out some of these growth projects given increased competition and slower growth in general?.

We're going to continue working on the costs of all our businesses. And we've taken various actions, some of them we talked through already. We consolidated a couple of service centers. We are taking out some older cost assets as we speak. We're consolidating some warehousing in different parts of the country.

We continue to increase the efficiencies and production of all the different businesses..

Your next question comes from the line of Susan Maklari with Crédit Suisse..

My first question is around - there's obviously been some sense that markets have slowed globally. You noted Europe as well as the U.S. Is there anything that feels different to you in terms of the - perhaps the outlook for one region versus the other? Do you expect more growth to come through next year in the U.S.

or in Europe versus the other?.

I'm not so sure my ouija board is any better than yours at guessing the future. I can say that like Mexico, Mexico, last year, the ceramic business grew double digits. This year, it's negative. I have no idea what's going to happen with the NAFTA behind and where it is. We believe it's going to get better, for instance.

In Europe, the first half of the year was stronger, and we've seen weakening across almost all the markets. As we go through, there's a lot of political things making people uncomfortable. And I'm not sure how they're going to translate into next year's growth, and in particularly on all parts and pieces.

In our ceramic business, we have a large business in Italy, and there's all kinds of confusion over the political environment as it goes through. So at the moment, we're just assuming all of them are going to be somewhat softer. But I can't tell you that we have any insight that's going to tell us how much or what's going to happen..

Okay, that's helpful. And then in terms of the Eliane acquisition, Brazil's obviously a market that you've talked about for a while.

Why did you decide that this was a good time to get into this? And how should we think about the growth that may be that can sort of add to your business over time?.

We've looked in Brazil for a long period of time, and we've talked to a lot of companies. And the ceramic industry had gone through a downturn, and it's coming out of it. We think that it's improved, and that allowed us to come to an agreement with one of the companies that we think is one of the best down there in Brazil..

Yes. I would just add that we've had discussions with Eliane probably 15 or 20 years. The - it's an excellent family, excellent management team. They have the number two position in Brazil, which is the - a huge market and has the best brand in the market..

So we think it gives us a good position to grow from. And we started in Europe, and we bought one business in Italy. And now we have positions in Italy, Spain, Bulgaria. We're building one in Poland. So it's a large market where ceramic is really strong, and we're hoping that it will give us a foothold to expand the business much better.

Their business has always been constrained by capital, and we think we can provide them more capital and we can help them beyond that. So it seems like an opportunity to expand on a long-term basis..

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

Jeff, it's about the trade-down you're seeing with customers.

Can you give us a little history lesson of when the last time was that you saw a trade-down of this magnitude across your businesses? And how long it took you to recover and what it tells us about where we are in the cycle?.

So normally - there's two parts. One is you have - you always have trading down when you have inflation. So whenever you have high rates of inflation, you see trading down as people try to maintain price points in pieces. Now usually, the inflation amount, it doesn't - isn't as great as this, so there's more trading down going on.

At the same time, you see a channel mix change with us, whereas LVT - this one's different as LVT is taking more of the growth in the normal channels, we are getting more volume in lower-value price points. So that's not a normal circumstance in this. Normally, we would have that circumstance in a recession, and it's not for the same reason.

In a recession, we try to optimize our price mix and maximize our margins when business is good. In a recession, what happens is we start taking lower-value, lower-return products to keep the assets running. So this time, it's caused more because the industry volume is more.

And then all this together then changes the competition in the marketplace as everybody's reacting to the situation..

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

It's been a long call. I'll keep it to one question. But Jeff, just a strategic question on ceramic. I guess if the market's shifting to a greater degree of import sourcing, does it make sense for Mohawk to begin supplying the U.S.

market with your foreign capacity maybe over the longer term, because I know you got a lot on your plate right now, but over the longer term investing sort of foreign nontariff export platforms that can you allow you to more competitively serve all segments of the U.S.

market?.

We have - with the prior moves in Europe, with Bulgaria, we have a - Bulgaria is the lowest labor area in all of Europe, and it could be one of the lowest ones in the world. We have Brazil, which is a lower one which is new. We're in Mexico, which is also low. So - and we have Poland, which is also low.

Now on the other hand, ceramic has high freight so we can - it's not that we can't compete. It's that our margins are less. As the dollar strengthens, our cost positions allow us to compete, except the competition is reducing our margins. And we try to balance the volume with the pricing that we do..

Yes. I would say in every market, we are the low-cost producer and we have the best product offering and the best distribution in every market that we're in. The strong dollar in the U.S. is causing imports to be more competitive than they normally would. But even in the U.S., we're a low-cost producer..

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

Two questions. First of all, the competitive dynamic you're talking about in the U.S.

regarding the LVT and imports, how do you feel about that happening in Europe in a similar way?.

Europe is a totally different market, and it reacts different. And then you can't really even talk about Europe as a whole because each country and the dynamics and where they're located are different. The U.S. is used by a lot of countries as the dumping ground and has always been.

In ceramic, I think 50-something percent of the ceramic sold in the United States historically comes from somewhere else. So we're used to competing in this environment with it as you go through. In Europe, you have a different set of dynamics.

So our European business out of Italy is based on mid- to high, and we have very little sales in low coming out of our Italian operations. Different than our Bulgarian operations. They focus mostly on the mid- to low end, and we're expanding capacity to ship more into the rest of Europe from Bulgaria. But that's not our core business as you go through.

But in Europe, in the last 1.5 years or two, they have increased the production of ceramic. And then what happened is the ceramic industry has slowed down, so the competitive nature of the market has changed in the last 4 or 5 months from where it has been. And we're having to react with pricing as well as other things in the marketplace.

But in LVT it is not accepted and it's not as broad as it is here. You get down into the southern part of Europe, I mean, they've been using ceramic in huge quantities for thousands of years. It's embedded in their culture. And again, each market's a little different. So we don't expect that LVT will reach the same levels, but it's increasing.

And we are one of the largest participants in it over there..

Ladies and gentlemen, that is all the questions we have for today. I would now like to turn the call back over to Mr. Lorberbaum for closing comments..

We have temporary conditions that we're adjusting to. Our business' investments will improve our margins and our profitability over time, and our new investments will be optimized when we get the volume and mix where we would like it. We're well positioned for the long term.

In the short term, we're really focused on improving our margins in the various businesses. Thank you for joining us..

Ladies and gentlemen, this concludes today's conference call. You may now disconnect..