MHK
#The industry units I think in the quarter were about flat as that for it.
We don't give out granular detail by product.
To give you something as a long-term direction, you know we talked about the investments we have.
We have three plants that are some of the biggest and most productive in the world.
We're adding two lines to them.
We get all our capacity in we'll have over $1 billion worth of an LVT capacity in our organization which I don't think there's anybody close to anywhere in the world.
Correct.
That's correct.
The multiple was about a little bit over 1 times what the selling price was.
It's just below 200.
I think we're in the same position.
We felt the markets were going to be reasonably good.
We thought that our position in the markets were at the best it's ever been.
We came in expecting to invest in all the pieces and I think the biggest change is that these acquisitions take a while to get through and to assimilate in the business and what you don't want to do is exceed the organization's ability to execute.
So the biggest change is the speed at which the organization has assimilated these things and I think the organization can take on more than I thought it could six months ago.
Your guess is as good as ours of what the rates are going to do for the rest of the year.
But with the euro at $1.13 or $1.14 right now that's favorable to last year.
I don't think we have that detailed information in front of us.
I think what we keep explaining is that these investments we've been making aren't to look at, the investments are to increase our productivity.
We have very strict strategies about return on investment and hurdles they have to overdo on one side.
On the other side the margins we're getting is because we're also investing in equipment that allows us to differentiate the products in a marketplace and get higher premiums.
We talked already a little bit about the laminate business.
We're investing in our older equipment in our ceramic business to make bigger sizes and smaller sizes which most of our competitors don't have the capability.
And so these investments are helping the mix as well as the cost in all the different categories.
And again like I said, if we can find more of them we'll do them.
It's still the slowest part of the different channels.
The new construction and the commercial were better.
Everything we read tells us that the consumer is going to spend more money on remodeling this year than before.
All the projections we're seeing from others, we have not seen it huge upswing from the historical trends.
We're still seeing the same trends we saw in the past quarters but there's a potential that they improve significantly and we would sure enjoy it if it happened.
I don't have that detail here either.
Off the top of my head I would think that the ceramic business has the highest percentage of commercial in the segment.
It would be the highest and the lowest would be the laminate and wood businesses which tend to have in that segment because they tend to have limited amounts in the commercial business in both categories which would leave the carpet business somewhere in between.
I would guess it would still be in that area.
And acquisitions.
Most of our internal investments when fully executed tend to be between two and four years and most of the acquisitions tend to be more in the five-year plus or minus ranges.
Are you talking about for acquisitions.
Our internal reinvestments if they don't meet our hurdle rates we won't invest in them unless it's something you have to have just to maintain the business.
And so we have processes that we go through that say if they don't reach these rates we're not going to utilize our money to go after it and find something else.
We continue to look at so one is on and tends to be the fastest things are replacing existing equipment because the risks are very low and you know that they are going to operate at fairly high levels as soon as you do them.
On the other extreme, probably the difference between putting in new capacity and new product categories and something you own, what happens is it takes a longer time to build up the sales on the front end, so you have the cost and the learning curve on the front end without enough volume.
So those tend to be a little longer.
So but what the difference is the returns in the first year or two are lower but when you get out to year five and six they are much higher than the acquisitions as you go through.
And then the acquisitions are all over the place.
If you buy a really good business you're going to have lower returns if you buy one that's in difficulty, you're supposed to have better returns that you change the strategies within the business.
We've already done it in multiple locations.
For instance we're one of the largest countertop distributors in the country today and we got into it because we started out with ceramic flooring, then we went to stone flooring, then the next adjacency over was stone countertops.
So we've moved into it.
So the countertop business is an adjacency we've already moved into.
We get the largest benefit out of buying things that are in the categories we're in that we can leverage our knowledge in marketing and distribution across the new business.
And we get the least synergies out of going into something that's brand-new.
As we get further from where we are and we've done it when we move from carpet to ceramic or ceramic to laminate or laminate to vinyl, what you see is that when you see us move into the categories we normally start by buying the best competitor in the marketplace.
And the reason is we're buying the knowledge of the category as well as the business.
And we start with the best, and then what we try to do is feed it additional capital and try to see if there's other synergies between how we operate businesses, the information systems, the methodologies, and those things create more benefit.
And then as long as we're staying in things that go through the same customers and channels, we can actually pull their products into our channels and vice versa as we go through.
The extent past there is going into totally new geographies, and we've gone into them both ways.
We've gone into them greenfield and we've gone into them by buying what we perceive to be typically best of class in the category too.
On the other hand, we break all our rules.
When we got Marazzi, we got a ceramic business in Europe that was performing horribly, and we put in a new management group in that and made that work.
So I think the only thing you can say about our strategy is we have the capacity to work in all types of environments.
You're beyond my known horizon.
I can tell you that if I can find enough things to invest and the things that I have as core knowledge bases, I would prefer that over others.
For me to go into the other ones, something that we don't know, we're going to have to find the right candidate that gives us the right knowledge base.
And we have to be a strong base in what we do to do that; we would consider it as if.
The biggest pieces of them are in expanding the sales force in order to get to more customers.
And up until a point we said that our goal was to decrease ---+ to increase the margins and we were getting leverage out of it, we said last year we're going to move from driving leveraging it to increase the margins to driving expansion which we said we were going to do through expanding the sales forces, putting more investments in samples, putting more investments in displays and stores and putting out more product categories and more differentiated products which we would believe should help our business margins and market shares.
We have looked at we are actually in the middle of expanding Pergo into the LVT and into laminate and engineered wood in different categories and then we're looking at finding the right partners and distribution channels to do that.
And we're at various stages throughout the year in implementing those things.
Just to make a note, Pergo is the most known brand in the flooring industry.
So utilizing it and optimizing it across different product categories we think is a big opportunity.
Listen, you're clever, you're trying to get me to give you future estimates beyond the one quarter I give you.
I think that we're going to see a good year in the category.
We've said that we think it's going to be the trends of the industry will be similar to last year.
You said it right, the biggest opportunity is for the remodeling business to increase because the big upside there is not only has it more volume, the mix of the products are higher and the higher margin.
So those are opportunities to go there.
I think all things are in place to increase our mix, our margins as we go through.
And I think what we've said is we anticipate the incremental increase in margins to be slightly less than they were last year.
It gets harder and harder to keep pushing up the margins and the sales we'll get to see with you when they happen.
I'm not sure I have an answer that's easy for you.
I mean you're right at the size we're at, 5% of $8 billion is $400 million to grow 5% a year.
We're putting in capacity for multiple years as well as going into new product categories which takes further.
So if you say you're going to grow at these rates for time it requires these investments to do it and we're putting them in ahead in order to support it.
How much we're going to take and share and not I don't really know how to answer the question.
So we're talking in the US market.
I'm not sure I know all those numbers off the top of my head.
I think in the US it's probably in the 7%, 8% range today.
We think it's going to grow mid-teens as a category, so the 7% or 8% in dollars would be about $1.4 billion maybe today and you can figure $200 million a year, 15% give or take.
So there's a lot of requirements, it's growing.
The difference in it and laminate, for instance, it is in every market in every category where laminate wasn't is it.
And we'll get to see how far it grows over time.
As you can tell from our position we think we have leading technology in the manufacturing of it.
We think we have unique knowledge in the style and design of it which we get from both our ceramic and laminate and wood businesses that we already have.
And so we're positioning ourselves to be a leader in it.
I think the Russian market has probably declined 35% in total since the things started down.
Our business is up and so we're taking share from somebody.
Some of it is coming from imported products that have gotten close to disappearing from the marketplace which at one point were a large part.
I would guess our share is probably somewhere in the 15% share as we start.
Our strategy in Russia is we are focused on the mid- to high-end part of the marketplace.
We have the only brand in Russia.
We have owned distribution across Russia.
We have about 300 and something franchise stores across Russia which we own about 15%, 20%.
So we're well-positioned in the high-end part of the marketplace and we think we can keep exploiting it.
We're basically running all our capacity and then we're putting in new capacity this year that actually makes more higher level of product that historically would have come out of Italy.
And our intention is to become the premium supplier of it.
And that is where we are.
And we think it's a good opportunity.
If the market ever turns around we'll be in really good shape and the negative at the time, though, is our margins are declining as we're driving our business through the market.
What you see is the total, so what you're really seeing is higher investments in certain categories offset by continued leverage in other ones.
So presently it's about flat.
As we go through the year you should see some improvement in it even though we've been increasing others.
So we expect the investments to level out and get some benefit from those as we go through the air.
But you still have large parts of the business that are decreasing those costs as a percent of sales.
Let's see, I think this year the startup costs in the first quarter were around $10 million ---+
$10 million in the first quarter and we could see $25 million to $30 million for the full year.
This year.
And we'll have more startup costs in next year as well.
Yes in both, in all categories.
So let's talk about one.
My ceramic business in North America, I'm selling basically all I can make.
I am supplementing it with product out of my other manufacturing regions.
We have a new plant coming up.
And so we think that the ceramic industry could grow this year in North America 5%, 6%, could be more or less.
So we have to have ---+ and it takes about a year and a half from the time you start the project to get the capacity up.
So what you see is our investments are supporting the things a year, a year and a half out or more.
If we don't invest now we won't have it then.
The business that we're putting on the wall is mostly ceramic tile and ceramic wall tile is expanding.
There is a trend in the marketplace to put decorative walls using various surfaces from wood to laminate to ceramic on the walls as we go through.
It's a trend that's just starting.
We think it's going to continue expanding and we're trying to figure out how to push the strategy even faster with people decorating pieces in there.
There are some new technologies in ceramic to make really large wall spaces out of ceramic, for instance, could be a new opportunity down the road.
Any of the product categories we make could be used as decorative pieces but not as coverings over 100% of the walls.
I think it's going everywhere.
It will be when the category now, when you start getting to create new markets and new things they take a while to mature.
So when you go into new products it doesn't happen overnight.
We had a good quarter.
We think we are well-positioned for the future and we are trying to take advantage of all the opportunities we can identify and we appreciate you joining us.
Have a good day.
