Mohawk Industries, Inc.

My name is Kelly and I will be your conference collaborator today. At this time I would like to welcome everyone to the Mohawk Industries Second Quarter 2019 earnings conference call. All lines have a place to unmute to prevent any background noise. After the speakers are marked there will be a question and answer period. If you would like to ask a question during this time, please press star then the number one on your telephone keypad. To withdraw your question, please press the pound key. Should anyone need any assistance during the call, please press star then zero and an operator will assist you. As a reminder, ladies and gentlemen, this conference is being recorded today, Friday, July 26th, 2019. Thank you. I would now like to introduce Ken Heweskamp, Investor Relations Vice President. You may begin your conference.

Thank you. Good morning everyone and welcome to Mohawk Industries Quarterly Investor Conference call. Today, we'll update you on the company's results for the second quarter of 2019 and provide guidance for the third 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 by the Private Security 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 discussions of non-GAAP numbers. For a reconciliation of any non-GAAP to GAAP amounts, please refer to our Form 8K and press release in the Investors section of our website. The key speakers today are Jeff Lorberbaum, Chairman and Chief Executive Officer, Chris Wellborn, Chief Operating Officer, and Glenn Landau, Chief Financial Officer. I'll now turn the call over to Jeff for his opening remarks.

Jeff. Thank you, Ken. In the second quarter, our business delivered results at the high end of our guidance. Our sales were $2.6 billion, up slightly as reported, and up .4% on a constant basis. Our adjusted operating income was $277 million, or .7% of sales. The U.S. dollar strengthened compared to the prior year, reducing our translated results for the quarter by approximately $9 million. Most markets we operate in remain soft and with pressure on volume and pricing. We anticipate the environment to remain difficult. In the U.S., housing sales remained below last year's levels, impacting flooring demand in our largest market. LVT continued to grow significantly, affecting our other product categories. Many of our other geographic markets softened with their economies reducing flooring sales and increasing pricing pressure from excess capacity. In Europe, political and Brexit concerns slowed the economic growth. Australia was further impacted by a housing bubble. The Russian economy has softened and Brazil has slowed due to political uncertainties. The Mexican ceramic industry is growing despite a slowing local economy. Given these uncertainties, we are taking actions to improve our business. We are streamlining our operations, consolidating facilities, and taking out higher-cost assets. We are reducing production to control inventory levels, introducing new product categories, and increasing promotions to address changing markets. We are reducing overhead structures and controlling investments. We benefited in a period from lower material costs offset by labor and energy costs that continue to rise. To recover inflation, we implemented many price increases in the first half of the year, though much of the benefit has been offset by mixed and competitive pressures. We are improving our administrative costs while investing in sales support, new products, and entering new geographies. Our LVT manufacturing has improved significantly with increased speeds, efficiencies, and yields in both rigid and flexible products. As our LVT process is improved, we are initiating trials on new features to enhance our differentiation. We will implement additional process enhancements this year as we further improve our outputs. While managing these challenges, we are enhancing the long-term value of the business. The utilization of our new investments in U.S., Europe, and Russia is increasing as we broaden our product offering, expand our customer base, and add shifts to increased production. The critical integration of our acquisitions in Australia, New Zealand, and Brazil has largely been executed. Our management teams there are focused on improving our market position, offerings, and cost structure. In each acquisition, we are progressing with new investments to enhance our capabilities and introduce new products. These acquisitions are contributing to our results as we build a foundation for growth and margin expansions. The margins of our Greenfield projects will increase over time as our sales, production, and mix improve and costs decline. For the specifics on the period, I'll turn the costs over to Chris Welber.

Thank you, Jeff. For the quarter, our global ceramic segment sales increased about 3% as reported and were up about 5% on a constant days in exchange rates. And the segment's adjusted operating margin was 12.4%. Headwinds from slower markets and competitive pricing impacted the results of most of our businesses. The U.S. ceramic market has declined this year due to lower home sales, the continued growth of LVT, and customers trading down. Prior to the increase in Chinese ceramic tariffs, a significant amount of inventory was imported, increasing pressure on the industry. We believe our ceramic sales are in line with the U.S. market with commercial outperforming residential. Increased competition and excess inventory have impacted both our pricing and mix. The government investigation of Chinese ceramic dumping has progressed and appears likely to be implemented. If approved, the present tariffs would go up significantly and remain in place for many years. In the retail market, a greater focus on LVT is impacting ceramic and customer inventories are being aligned with present sales levels. In the market, we are also seeing a greater emphasis on selling lower quality products to stimulate ceramic volume. Due to these conditions, we expect the U.S. ceramic market to remain soft in the second half of the year and we are taking many actions to improve our sales and costs. We are launching new collections to compete with premium porcelain being imported. We are adding salespeople in key markets and increasing our activity in the commercial channels. We are initiating promotions to increase volume and we are introducing products at lower price points to align with the market. To complement our ceramic offering, we have introduced Daltile branded LVT in commercial channels to increase our participation in the category. We are installing equipment for our new ceramic installation system which we have been testing for the past couple of years. This new product will significantly reduce the time and cost of ceramic installation. We are also implementing new technology to make it faster and easier for our customers to order and pick up at our local service centers. We are managing our overhead expenses, SG&A and capital spending. We are currently reducing production to manage our inventory levels while the industry stabilizes. We are pioneering two new products to expand our U.S. porcelain business. Earlier this year, we introduced porcelain roofing tile as an alternative to slate, clay and concrete roofing providing similar visuals at a lower total cost. Following a successful launch in Europe, we are also introducing very thick porcelain tiles for outdoor applications as an alternative to natural stone. Our new quartz countertop plant in Tennessee is ramping up and we are adding a third shift as we increase our throughput in yields. We have begun manufacturing more stylized products that will improve our sales and mix. The production will increase into next year when we anticipate operating the plant in your capacity. Our countertops are about 30% larger than the industry, improving conversion and material costs for our customers. Dumping duties of 300% have been implemented on Chinese quartz products, enhancing the value of our manufacturing plant. In Mexico, the ceramic industry grew despite the slowing economy. We are expanding our distribution, introducing new porcelain collections and supporting stores that only sell dealt tile products. We have expanded our participation in commercial with more specifiers and distinctive new products. The pricing actions we have taken are recovering inflation. In Brazil, our Ileonic business is performing well due to our leading brand, premium products and efficient operations. In a difficult ceramic market, our strong presence in retail, home centers and the builder channel is enabling us to grow, partially offset by softer exports. We have increased prices, improved mix and leveraged our SG&A to enhance our results. We are expanding our premium collection, increasing store selling, only our tile products and updating showrooms across South America to increase exports. To support our growth, we have restarted idle capacity and are installing a new production line which should be operating in the first of the year. The European ceramic industry has slowed with the economy, political uncertainty and lower exports to global markets. Commercial channels are performing better than residential. In this environment, we are growing our sales but it has impacted our mix and margins. To expand further, we have reorganized our European sales organization to focus on smaller geographic areas and specific channels. We now have six sales teams focused on the different channels of high-end retail, value products, commercial, distributors, landscape and kitchen and bath. We are using private label programs to further optimize our market penetration. We are also introducing easy installation ceramic technology starting with light commercial and outdoor channels. To improve our manufacturing efficiencies, actions to reduce manufacturing and SG&A costs are being completed. Additionally, we are implementing initiatives that are lowering our cost of decorating, materials, maintenance and energy. To enhance our service, we have begun warehousing volume products closer to our customers. The Russian ceramic market was weaker in the first half and is expected to improve the rest of the year. Despite these conditions, our business continued to have strong growth with our premium products improving our mix. We have expanded our brand advertising and have increased our company-owned stores. The new capacity we recently installed is being fully utilized to support our higher sales. During the quarter, our flooring North America segment sales decreased 7%. The segment's operating margin was 6% as reported and on an adjusted basis. The North American flooring market remains challenging with U.S. housing sales below last year and LBT taking share from other products. From the prior quarter, our margins improved due to seasonal volume increases and lower material costs, partially off-step by other inflation and decline in mix. Relative to last year, sales were softer in most categories as customers traded down and price increases were offset by a declining product mix. We underperformed in residential carpet with commercial carpet performing well. Our LBT manufacturing substantially improved as both speed and yields increased. Paul DeKock, the segment president, has completed his management reorganization and the new team is in place and making improvements throughout the business. His division presidents have realigned the functions to enhance the strategic strategies and execution. We have made significant progress on our cost improvement actions, including replacing inefficient extrusion and closing four higher cost operations. When completed, the cash cost of these actions will be recovered in about a year after flowing through the inventory. Residential carpet sales have declined and lower cost polyester carpet is taking share and impacting our mix. We are increasing our promotional activity and we have introduced new products to defend our market position. We have expanded our recycling operations so we can provide more sustainable options to the customer. With this, we have expanded our polyester carpets with multi-colored visuals at lower price points. To enhance our retailer performance, we are expanding our Edge Incentive Program and our Internet Lead Generator that drives demand to the stores. Our commercial carpet tile business continues to grow as we introduce innovative styling as well as new pattern technologies. We have expanded both our premium offering for the specified market and value alternatives made of polyester. We have increased our capacity to satisfy our growing carpet tile demand and we have reduced our cost structure by initiating production of some of our materials. We have expanded our Diffinity offering, which is increasingly being used as an alternative to more expensive woven products. Our waterproof lamina products with enhanced visuals and textures are improving our mix and average selling price. Our premium redwood collection is increasingly being used as an alternative to wood and rigid LVT in both new construction and remodeling due to its superior visuals, scratch resistance, and waterproof features. We are upgrading our HDF manufacturing to increase our capacity and reduce our cost. We have consolidated multiple warehouses with our manufacturing and we are further increasing our process automation. We are making substantial progress with our LVT manufacturing with output increasing more than 30% in the period. As we proceed through the year, we anticipate further improvement in production and cost, as well as introducing new features that are being developed in Europe. Our rigid LVT is growing significantly in the market and our flexible LVT is the preferred choice where noise reduction is a priority. Our new Purgot Extreme collection has been widely distributed in the market as a premium option with high consumer brand recognition and superior performance. We will further expand our sales in LVT as we introduce new visuals and features from our operations. Sales from our manufactured sheet vinyl are growing as we introduce innovative products with unique features and our margins are improving. For the quarter, our flooring rest of world segment sales were up 9% as reported and 15% on a constant basis. Our adjusted operating margin was .7% up 11% on a constant basis. Even with softening economies, the segment is performing well due to our investments in product innovation, cost improvements, and new businesses including European LVT and carpet tile and Russian sheet vinyl. Our European laminate business is growing due to our unique surface technologies and water resistance in our premium QuickStep and Purgot brands. Our distribution acquisitions in Europe have improved our service and broadened our customer base. This fall, we will introduce the next generation of advanced surface visuals to further differentiate our designs. The sophisticated wood realism we achieve using our proprietary technology cannot be matched by other florings. Our Russian laminate expansion is operating well and we are increasing our sales and distributions to fill the plant. During the second quarter, we opened eight flagship laminate stores in Russia to bring attention to our premium laminate collections. Our two original European LVT lines are performing well and are providing us with competitive advantages. Our new third line dramatically improved during the period with production speeds, efficiency, and yields increasing substantially. Presently, the new LVT line is running flexible faster and producing rigid almost as fast as the old lines. Further changes this fall will make our manufacturing more competitive and improve our margins. We are expanding our products and distribution to utilize the increased capacity. We will be adding new features to our production this year to increase the value of our products. Our new sheet vinyl plant in Russia is ramping up with productivity and quality similar to our established operations. We are expanding our customer base and product offering to achieve our expected results. Now that the Russian plant is operating, we have additional capacity in Europe to increase our product line and broaden our distribution. The European panel market has slowed, resulting in volume and price pressures. We are introducing innovative products that will provide higher margins and strengthen our position. To reduce our cost, we are expanding our glue production and we are building a second -to-energy plant, which will also support our environmental goals. Our insulation business continues to perform well as the industry expands and our volume grows. Material availability and costs have returned to normal after last year's industry shortage. With greater insulation value, our polyurethane product is taking share from other alternatives and growing our volume. The economies and housing sales in Australia and New Zealand have slowed, putting pressure on the flooring markets. To enhance our position, we are launching many new soft and hard surface products that utilize concepts from other geographies. We have significant opportunity to grow our hard surface business by leveraging Godfrey Hirsch brand recognition and the distribution network. We are installing new carpet tile equipment to expand our commercial sales. We have closed high cost yarn production in Australia and are presently supplying materials from the US and other parts of the world. I'll turn the call over to the land who will review our second quarter financial performance.

Thank you Chris and good morning everyone. Moving right into our financial performance and -over-year bridges, second quarter net sales were $2.6 billion, up .3% as reported, or up .4% on a constant basis, adjusted for FX and days, compared to prior year. Organic growth in legacy businesses on a constant basis was down .9% in the second quarter, bringing our -to-date growth down 1% on a constant basis versus the first half of 2018. In terms of earnings, the company's adjusted operating income, as Jeff already shared, was $277 million in the second quarter, or .7% of sales, up seasonally from the first quarter by 220 basis points, with an improvement in our -over-year decline in margins by over 100 basis points, both as we expected. Bridging from the prior year's second quarter, adjusted operating earnings were impacted by the lower price mix of $30 million, weaker volume of $8 million, and a net increase in inflation of about $10 million, helped by low raw materials. Additionally, temporary production confirmments to match our supply with our customer demand cost $3 million, and productivity, less reduced startup costs, was down to $2 million negative. FX translation impact was favorable, approximately $9 million. SJ&A per net sales was 18.1%, excluding unusual items, down 60 basis points from the first quarter, and up 120 basis points -over-year, due to investments in selling and marketing to drive sales, including rollout of initiatives from new startups. Special items in the quarter were $10 million, for continued restructuring and integration costs, of which most were cash. In the second half, we anticipate additional charges of approximately $42 million, associated with ongoing restructuring efforts, as well as remaining acquisition integration expenses, bringing full year unusual and non-repeating costs accounted for as special items to approximately $94 million. Of this total, restructuring represents $72 million, primarily in Florian, North America, and rest of the world, to consolidate operations, close plants, and reduce the workforce. The balance is related to acquisition integration. The cash component for this restructuring is about $28 million, which should be recovered in about a year, as lower costs work through inventory. Adjusted EBITDA was $420 million, or 16.3%. Interest expense of $11 million is up from $8 million last year. The $3 million delta is due to new debt from acquisitions and an increase in commercial paper rates. The effective tax rate for the quarter was 22%, and is expected to move into a range of -20% in the third quarter, moving full year guidance down to 20-22%. Finally, adjusted net earnings per share was $2.89 in the quarter, down from $3.51, or 18%, from last year. Turning now to the segments, Global Ceramic delivered sales of $958 million, an increase of .1% as reported versus last year, or up .3% on a constant basis. -to-date legacy sales are flat on a constant basis. Operating income on an adjusted basis was $119 million, or .4% of net sales, down from a .1% margin last year. This is primarily due to weaker demand complicated by temporarily higher industry inventories associated with pre-buying ahead of tariffs. Compared to last year, inflation was $20 million higher, softer volume and market-related downtime was a headwind of $8 million, and costs for product development, sales personnel and marketing were up $3 million, all partially offset by improving productivity and lower startup costs of $16 million. FX translation was unfavorable by about $4 million in the quarter. In flooring North America segment, sales were $983 million in the quarter, down 7% -over-year on an as-reported basis, driving -to-date sales down 4% on a constant basis compared to the first half of last year. Adjusted operating income improved versus the first quarter to $63 million, or .4% of net sales, but was down $47 million -over-year. Volume adjusted for lower shutdown costs accounted for $21 million of the downside, and productivity less reduced startup costs was a further $18 million. Price mix slipped approximately $6 million, and inflation cost us about $3 million. Now moving to flooring rest of the world, the segment performed well, with sales $643 million up -over-year by 9% as reported, or up .7% on a constant basis, all supported by underlying legacy sales growth of .5% -to-date on a constant basis. Adjusted operating income came in at $107 million, or .7% of sales in the quarter, with income up sequentially and compared to last year, as relief on overall inflation of $16 million driven by lower input costs and improved volume and lower shutdown costs totaling approximately $7 million. Supported by acquisitions and strong LVT, laminate and installation performance in Europe were only partially offset by lower price mix of $21 million, and productivity less reduced startup costs of just a million. FX translation was unfavorable by $6 million. Finally, corporate expenses and eliminations drove an operating loss of $12 million, with the full year estimate holding in a range of $35-40 million. Now speaking to the balance sheet, receivables ended the quarter at $1.8 billion, with day sales outstanding up due to changes in geographic and channel mix. Inventories ended the quarter approximately $2.4 billion, or 126 days, basically flat versus prior quarter, and higher -over-year by $306 million, due to ramp-up of new investments, acquisitions, and increased source products. Fixed assets for the quarter held at $4.7 billion compared to the prior quarter on capital expenditures of $144 million in the period, or roughly depreciation in line with plan. Guidance for the full year continues to be capex spending with a range of $550-580 million, again roughly in line with depreciation of $570 million. Total debt was $3.1 billion at the end of the quarter, down $200 million since exiting the first quarter, with leverage declining to 1.8 times -to-adjusted EBITDA. Wrapping up now, the balance sheet is strong, with free cash flow of $252 million -to-date, and improvement of $60 million over prior year, this reinforcing our expectation of a solid year in cash, with generation at or above $700 million. And with that, Jeff, I'll turn it back over to you.

Thank you, Glenn. The general conditions in our flooring markets around the world have become more challenging and competition more intense. We're taking actions to improve sales, reduce our costs, manage our inventory, and adjust our offerings. The U.S. flooring market is the most difficult, and we are taking actions to increase our volume and reduce our costs. In the U.S., ceramic, lower demand, and purchases ahead of tariffs have created excess inventory in the market, which is impacting sales and margins. Our LVT production has increased substantially in the U.S. and Europe, and will continue to improve throughout the year as we introduce more sophisticated technology. Our flooring rest of the world segment is delivering solid results despite softening markets. Our new plants in the U.S., Europe, and Russia have made substantial progress, increasing outputs, and we are increasing our sales to achieve our planned results over time. Taking all this into account, our EPS guidance for the third quarter is $2.58 to $2.68 per share, excluding any one-time charges. As we manage through the current conditions impacting the flooring sector, we are focused on optimizing the long-term growth of our business. We are implementing numerous changes that will enhance our future results. We have leading positions in our products and markets, and our new investments will provide solid returns when further developed. Our balance sheet and cash flow are strong, with our net debt to adjusted EBITDA at 1.8 times, which will further decrease by the end of the year. We'll now be glad to take your questions.

Ladies and gentlemen, at this time, if you would like to ask a question, please press star then the number one on your telephone keypad. Management requests that you limit your questions to one primary and one follow-up. If you have any additional questions, you may re-enter the queue again by pressing star one on your telephone keypad. Your first question comes from the line of Tim Moise from Baird. Please go ahead, your line is open. Tim

Moise. I think I was on mute there. Good morning, everybody. Hi, Jay. I guess maybe first on just the inventory. I guess when we think about how you're managing production, what type of growth rate for the industry are you kind of zooming around that? If we look into 2020 and theoretically if the industry was down, how much would production need to be reduced to kind of right-size the inventory to get to that level? I mean, would it have to go into Q4 and Q1 under that kind of theoretical situation?

I mean, you just have to take the turns in the inventory times whatever the volume is going to be and that's the change in the inventory. You'd have to guess at whatever you'd want it to be, expect it to be.

Is there any sense of kind of how you guys are thinking about it over the next couple of quarters?

We're going to see how the world develops over the next six months and we'll have a better view of it.

Okay. I guess just maybe on LVT, how do you feel about the productivity of the European facility today? Is it covering the overhead cost, the new line? Is it covering the overhead cost yet or is it still modestly negative?

We've made dramatic progress in the last quarter stabilizing the LVT lines, increasing speeds in yield. In Europe, the market today is still primarily flexible LVT with RIDGID gaining acceptance just at the beginning of it. The new line is presently running flexible LVT at higher rates and it's running RIDGID almost as fast as the older production lines. With further changes this year, we'll improve speed, yield and cost which will make our manufacturing more competitive and improve our margins. Just as a note, the product's floor performance is the best in the marketplace and this fall we'll be adding new features to increase it. Relating to the U.S., in the U.S. our production increased 30% over the prior period. The line is about three months behind the European line in its progress and they're collaborating really well with people going back and forth almost weekly to keep them in sync. In both markets we're focused on expanding sales and product offering and adding new features. We continue to improve our sales mix but it takes time because when the production moves up it takes time to align the market with the changes in the production. It doesn't happen overnight.

Is there any sense of or timeline in terms of when you think the European facility can become beyond breakeven?

It's moving towards that now. We have to keep making changes. We expect next year for the thing to turn and then the profits will take time. I don't know how fast we can align the sales in a mix to get it optimized. It may happen, you know, the latter of next year may take longer to get fully optimized.

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

Hi, Steve. Thanks very much, guys. I wanted to ask you about some of the wording you used in your press release and also on today's call relative to what it was in late April when we last spoke with you in this forum. In April you said that the Florida North America business had improved entering the second quarter supported by an improving housing environment. And then today we've seen that residential carpet sales are down and you said you were going to increase promotions and you intended to, I think you said, defend your market position. It's kind of a big change in tone and it made me wonder, have you lost some customer accounts or something in Florida North America? Can you talk about what happened in that segment in the last two months of the quarter and how long it's going to take to reverse this trend?

Coming out of the first quarter we thought we were seeing trends that were going to improve it. We thought that the mortgage rate decline would have improved housing and here we are three months later and the housing market still remains slow as it and competition has increased. The LBT is still impacting all the other categories and putting pressure on them with it. You have a decline in industry units in almost all the other categories but LBT as you go through. And then in the residential carpet business we underperformed the market that we did. We changed leadership to address it. The new teams make in place. They've made dramatic improvements throughout the business. At the same time the mix has declined. We're increasing more promotional activities along with the marketplace. We're expanding our polyester offering as it grows in the marketplace and we're taking actions to improve our results by increasing, by reducing the headcount, replacing high cost assets. We've closed inefficient plants and we'll continue to take more actions through the fall.

Okay, that's helpful, yeah, through the fall. And then I wanted to talk about the inventory. In particular you used a phrase in your 10Q, temporarily reducing production. I think in one queue it was 7 million mostly in ceramic. I was wondering Glenn, could we get a sense of what that number was, that temporarily reducing production, those sort of right size inventory levels? What was that in the second quarter and where do you think it's going to peak this, where and when do you think it's going to peak out this year?

Yeah, that's a good question. So we rebalanced in the first quarter our inventories. We came out of the first quarter with inventories where we wanted them. We took a very modest amount of downtime, about $3 million or so in the second quarter. But looking forward, that uncertainty relative to the big buildup in inventory in ceramic, not inventory at Mohawk, but inventory in the industry that is peeling away some of our sales, we will have a more meaningful downtime expense in the third quarter and

that's dialed into our outlook. Steve, I'll just comment. The industry units are off in ceramic due to lower housing and LVT. There's excess inventory in the market now that was purchased ahead of these tariffs and that's complicating the conditions and estimates. Also you've got a strong dollar right now has increased pressure on pricing. In the fall, we have this Chinese anti-dumping duties that are likely and we expect the market to stabilize as the inventory rebalances.

Yeah, next question comes from the line of John Ball from Seafield. Please go ahead. Your line is open.

Hi, John.

Thank you and good morning. I wanted to talk a little bit about carpet and I think you mentioned you underperformed the residential market. Number one, any kind of specificity around that and we keep hearing about mix erosion in carpet. Of course, we've seen the move to polyester for some time, but I guess you're seeing within polyester mixed in. I guess I'm wondering specifically, are you going to be going to this like phase two cost reduction? How do we get EBIT dollars in particularly the carpet area to improve?

Yes, we did underperform the market, which is the reason that we made the changes in the leadership a while back. The new team has put a lot of things in place. We've realigned the organization by product category. We've increased our operational performance. Our product and pricing management is better as well as our customer focus. There have been many changes that have already improved the cost, quality and service and I'm confident we're addressing the right issues. The mix, the customers are trading down from higher quality to lower quality, which is typical too. When you raise prices, they do tend to trade down to try to maintain price points and then trying to increase volume, everybody tends to sell price so there's more attention to selling price in the marketplace. In the higher price, higher differentiated products, we have higher margins so as you trade down, the margins compress in addition. I'm not sure I answered all the questions. You had a few of them. Any

sense, Jeff, as a follow-up, where volumes for the trade are, residentially, in carpet and where you came out? Also, with the lead laminate, the other big piece of the North American segment revenue, I assume volumes were down there, although you alluded to mix being a little better there.

The carpet industry was down, I think, about 6% in units and we underperformed in the residential and we performed well in the commercial business. In the laminate business, what you see is lower end laminates declining and premium laminates actually growing both in the US and in Europe. We're the leader in premium laminate with a very limited low end business where we have superior visuals, waterproof technology, we're ahead of the marketplace, scratch resistance, we're all making those grow as alternatives to both wood and LVT in certain markets and we're seeing it being used in more markets both in the US and in Europe.

Great. Thanks for that and good luck. Thank you.

Our next question comes from Matthew Buhle from Barclays. Please go ahead, your line is open.

Hi Matt.

Hi. Thank you for taking my questions. I wanted to ask about the promotional activity that you mentioned in both Florida and North America and Ceramic. You just helped us understand exactly what you're doing there. Should we anticipate that, I guess, price mix would decline further from what we just saw in Q2 and how long do you think these promotions will last? Thank you.

With the industry volumes under pressure, there's excess inventory and excess capacity in the marketplace and as you would expect, people try to promote to use more volume and we too, those are putting pressure on it and the pricing is all embedded in our third quarter estimate that we gave you.

Okay. Understood. Thank you. And then just secondly, LVT, in the US specifically as you've increased the production at the new facility and you just rolled out some of the Pergo branded LVT, what's your sense so far of the customer response to Mohawk's LVT products relative to the competitive LVT products out there? Thank you.

The products actually have better floor performance than the alternatives that are similar to them with the different performance features and we just have to keep expanding the alternatives and options in the marketplace to catch up with the production moves that we've already made.

Your next question comes from the line of Phil Eng from Jeff Rees. Please go ahead. Your line is open.

Good morning. Just first on a clarification question, Glenn, I think he called out a 70 million cash flow number. Is that free cash flow or operating cash flow for 19 and

appreciating? That is free cash flow so after our cap expending.

Okay, great. And appreciating you're facing some headwinds in the near term, is there a good way to anchor us to a free cash flow number for 2020? And when you expect to work through some of these issues, you're seeing, you know, when you kind of expect an inflection on a -over-year basis for EBITDA, could we expect that to turn maybe early 2020?

Let's see. We've gone over with you to try to review the conditions and what's going on in the businesses and the changes in different geographies and we're taking all these actions to improve the pieces, but the market's really hard to anticipate how all this is going to level out both with volume and margin so we're not giving out future estimates beyond where we are.

Got it. Okay, that's fine. And just given some of the excess inventory you called out in the channel for ceramics and appreciating there's increased competition, outside of the inventory drawdown that's going to weigh on profitability in the back half of the year, do you expect demand and pricing trends to kind of worsen from what we've seen in 2Q or is it kind of more of the same?

It's going to be difficult in the near term until the inventory gets all managed out. There's a high likelihood of these duties from China. China makes up about, in 2018, over 30% of the imported products that are coming in and if these duties get put on, there's going to be a reshuffling that goes dramatically around the industry and some of it's already started so we'll have to see how all that plays out.

And I'd just add, as that inventory gets rebalanced, which it will, we're doing a lot to introduce ceramic markets with this new installation method, roofing, outdoor products. We're also increasing sales, managing cost and matching our production with demand so that we'll be in a good shape when it does.

The next question comes from the line of Justin Speer from Zellman & Associates. Please go ahead, your line is open.

Thanks guys, appreciate it. In the implied third quarter guidance, I know there's a lot of moving parts in terms of inventory situation, but just wanted to get a little characterization around roughly 200 plus basis points of margin pressure implied in that guidance, I assume. But just help us understand or rank order some of the primary pressure points and maybe some of the potential offsets, particularly when we have our eyes on what oil prices are doing and a lot of your peers building products, rather than flooring, but building products, rather than benefiting from those dynamics. We expect you to get some offsets there too. Transportation costs a little better. So just trying to get a sense for phasing of this guidance, the pushes and the pulls as you think about the next quarter.

When you get out, we've gone through the third quarter with you with the excess inventories and the pressures in all the economies. As you look out further, we don't see anything that's going to change the softening markets in most of the places and the difficulties unless we get a surprise in the U.S. with housing and the economy, which could help. In the third quarter, we built in lower volume and margins relative to these pieces as well as increased competition and reduced production. And we have a lot of actions going on. The actions to take out costs, it takes over a quarter to flow through before they show up. So there'll be some benefits show up in the fourth quarter. And then after that, next year, you'll see most of the benefit of the different actions we're taking. Just to remind you, the fourth quarter margins last year were significantly depressed. It makes the comparisons easier this year.

I just add to that that you're starting to see in ceramic, you're starting to see these imports come down, but it's going to take a while to do that. And we've temporarily reducing production while that's happening until we get a view of it. Once that we're also doing as that's coming down, we're doing a lot of things to take advantage of it when it finally turns.

So a couple of follow-up questions. Just in terms of that $28 million cash cost and the one-year payback, should we view that as largely North America? And should we think about that, the cash, I guess the return of that on the other side, the payback from that? Should we think about that as a productivity good guy next year? Should we

model that as a positive productivity next year? So we're doing a lot of things. In Europe, we're optimizing headcount in the ceramic business and we're reducing wood capacity both in the US and Europe for the actions. The restructuring costs, again, the restructuring savings, first you have to complete them, then it has to flow through inventory. So the timing, and it depends on, some of them are already complete, some of them are just beginning, and some of them haven't started yet.

I'm sorry, I don't know if I cut out, but I don't think I heard the answer. So the payback from these productivity issues or productivity initiatives, should we think about that as being a positive next year in terms of the way we think about the model?

Yes, yes, they should be next year. The point is that some of the stuff that doesn't get completed till the fourth quarter, you won't get the benefit till the second quarter next year. So some of it, you won't get the full benefit for the year.

Your next question comes to the line of Mike Dahl from RBC Cabell-Marcus. Please go ahead, your line is open.

Hi,

how are you? Thanks for taking my questions. My first question, I guess, Jeff, just going back to your last comment or one of your last comments about just nothing that you can see that would necessarily change the softness in the markets. And obviously it's been pretty dynamic in terms of the environment, but it seems fair from the outside, not clear at this point in the cycle what would change kind of the growth and some of these mixed issues. So the question is really when you think about these restructuring actions you've taken, is this sufficient or is this kind of you're following the market a bit over the next couple of quarters? You'll take a little action right now, you'll reassess 2020 or is this a hard enough reset to your capacity and your cost base to position you now for the next year or couple of years?

Listen, we're reacting on what we see for the near term. If the industry gets worse, the economy's changed, we'll have to reevaluate what we're doing in each one.

One event that we know we're going to have in ceramic is that these excess inventories will eventually adjust themselves with the imports coming down and then you have the Chinese tariffs kicking in. Those are things that we have in front of us that should improve it.

Got it. Okay. And my second question is on LPT. There's clearly been a shift first from flexible to rigid and now within rigid there's a lot of different innovations in design around the product itself and the core. Can you talk a little bit more about what you're seeing in terms of some of the shifts which products are taking share within rigid and when you talk about the differentiation that you're hoping to achieve with your line, can you just help us understand what is different about your product?

You have to start out with that some of the different products are different materials and different pieces that don't change the product at all. People just use different formulations of different pieces and so that's just alternatives which don't change anything that different ones do. Second, there are some niche things coming in that have yet to evolve with different cores that may amount to something or may not. It's too early to tell in most of them. The production that we have, we can make all of the stuff that's selling at high volumes today and compete with them with the equipment that we have. In the US, our plan is to continue sourcing significant amounts and if there's some niche products or other pieces we need as well as the same things, we're sourcing those too so we don't see any limitations in what we can do. On the differentiation, you try to continue to bring either visuals, performance enhancements, surface textures, different ways of installing the product. You try to keep creating incremental improvements about those things as well as performance on how they scratch, how they dent and how it's going to improve the long-term ease of cleaning and care. All the different things we're doing are around all those different premises.

Your next question comes from Keith Hughes from SunTrust. Please go ahead, your line is open.

Hi Keith. Thank you. Question for Chris from Ceramics. Given the level of inventory you're discussing in the call, is this something you think the market can work off by the end of this year or will this spill into 2020?

I don't know exactly how long it's going to take to work it off. What we are seeing is that the imports are coming down now and any, I think, buying for Chinese product, there's not too much longer of a period left before they have the potential to get hit with the higher tariffs in September. But how quickly that gets worked off, I don't know. It'll take some time though.

Given it's Chinese, I assume this is coming at the low end of the market, is that correct?

No, Chinese comes in at all levels of the market. High, low, middle, all levels. And it's about 30% of the imports, so it's a substantial amount of the imports.

Okay, thank you.

Your next question comes from Eric Bossard from Cleveson Research. Please go ahead, your line is open.

Morning. A question and a follow-up. The U.S. flooring market growth, obviously a lot of pieces of it, but I'm curious what you think the total U.S. flooring market growth looks like in 2019 and what that number would have been in 2018.

I assume you've seen the data that somebody published. The data is all impacted by their counting the inflow of units into the United States from imports. So what happens is every product category that's being imported, there was a huge amount of inventory brought in. So all the numbers that are published in their methodology, they're not measuring sales, they're measuring inventory change in a system as well as sales. So the numbers lead you to different things than it is. It's all got to come back through and flatten out. My estimate is still that maybe there was about 3 to 4% growth last year and we're expecting it to be probably something less this year.

Less meaning slightly less than the 3 to 4?

Yeah. But most of it has been taken up by LVT, with all of

it. So I guess within, I'll just step up with that and then I have a second question. Is the change that is driving the different performance in your profitability in the U.S., or am I missing it, or is it really that the demand, the underlying demand is meaningfully different? Which is it?

Well, we talked about the carpet industry units being down near the date, about 6%. The ceramic industry, the numbers are down, so all the pieces are down. Then you have inventories that have to be adjusted through the stream, which compress it further, and then you have the competitive action of everybody trying to unite their assets and inventories, so the margins get compressed and all those pieces, and it's all adjusting.

Okay, that's helpful. And then the second question, you talked about Europe LVT, which was helpful to have you frame once you get the production and then you have to take it to market and it takes time to work through that. And I know you're trying to align the U.S. with Europe. It sounds like by the end of 2020 you think you have Europe optimized in terms of production and how it goes to market. Does the U.S. operate on a similar cycle? I know expectations have been resolved in the U.S. manufacturing is happening sooner, but what should we be in terms of thinking how quickly the U.S. is set and then aligned with taking the product to market? How should we think about that?

We think it will probably be about three months behind, because it could be four, it could be more or less, is it, in the behind. But then the optimization is a continue, even when we get to some point and continue to look at how we take costs out, how to speed it up further, how to optimize the mix and margins. And the same thing, you typically start out filling up the plant, commodities tend to move faster in bigger quantities, so you end up starting out selling more commodities and over time you move the mix up into better qualities to align it, is it. As you get through it, then these features and benefits that you keep adding to it allows you to get a greater margin on them versus things that are less differentiating. All that takes time to happen.

Our next question comes from John Lovello from Bank of America. Please go ahead, your line is open.

Hi, thank you for taking my question. First question is, do you think the competitive environment has changed to such a degree that given new entrants and so forth that industry profitability is just structurally different at this point than it was over the past few years?

It's hard to answer that question in a broad stroke. We're in all kinds of countries, markets, product categories, so every one of them is different. I was speaking

about the US specifically, if you don't mind,

Jeff. So the US, what you have is LVP taking a huge part of the growth, you have what's left is less and in the negative units you have the dollar is the strongest it's been in, I don't know, huge time, so that the imports are coming in at lower prices compressively. So you're missing the pricing of the different industries and then you have all of the local participants trying to run access of when price becomes one of the tools to do that. All of this is causing this short term pressure on it and it will change long term. The dollar, I've been in this thing for years, the dollar goes from a low point to a high point. When it gets to the high point all this stuff reverses. All of a sudden the costs go up, we end up substituting the other way, we push off mixed up and we abandon the lower price points when it goes the opposite way. So you have to work it over cycle. It's not a change in a business, it's just at different moments in the cycle.

Got it. Okay, and then maybe as a follow up Jeff, and just kind of dovetailing off of your comments there, you've been around the industry for a long time and if we go back pre downturn, I don't think Mohawk ever really took restructuring charges. And then fast forward post downturn, it seems like every quarter there is some degree of restructuring that's going on. I guess the question is, is that just the nature of the business today given it's more complex in many different countries or do you guys see a point here in the near future where this is going to be behind Mohawk?

Let me remind you that since from the 2012 to 2017 or 1817 we were buying two or three companies a year. We were buying big businesses. Every time you buy them you have to integrate the businesses together, you have to realign the assets and pieces, you have to upgrade the equipment and stuff you have in order to get it to where you want it to go. That's just a normal part of an acquisition strategy and enhancing. If you don't do that, you have to enhance the profitability of what you pay because the return based, if the business doesn't improve, the return on the existing profits, given what you have to pay for them, aren't enough to support your ongoing expectations for returns.

And that's all the time we have for questions today. I'll now turn the call back to Mr. Loverbaum for closing comments.

I think I'd like to leave it that we're optimistic about our long term prospects. We have a strong management team. We have some of the best assets and best positions in the marketplace. We're doing many initiatives going into new businesses that take years to get them optimized in mixed margin and distribution and we're moving well along the path to go forward. Over time we expect our results to improve and we think that the business hasn't changed. A little difference at this point is housing is slowing in the United States and it's slowing before the economy slowed so that's different at this moment than we've had before in different cycles. Usually they happen concurrently. They're not happening concurrently now and they may not be concurrent in the future. We have many initiatives to enhance our results. We're taking actions to improve our profitability and we're doing what we need to do for the business. We appreciate you spending time and being on the call with us. Thank you.