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The Motley Fool.

Mohawk Industries Inc  (NYSE:MHK)
Q3 2018 Earnings Conference Call
Oct. 26, 2018, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning. My name is Kathryn and I'll be your conference operator today. At this time, I would like to welcome everyone to the Mohawk Industries Third Quarter 2018 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer period. (Operator Instructions) As a reminder, ladies and gentlemen, this conference is being recorded today, Friday, October 26, 2018.

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

Frank Boykin -- hief Financial Officer and Vice President Finance

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

This call may include discussion of non-GAAP numbers. You can refer to our Form 8-K and press release in the Investor Information section of our website for a reconciliation of any non-GAAP to GAAP amounts.

I'll now turn the call over to Jeff Lorberbaum, Mohawk's Chairman and Chief Executive Officer. Jeff?

Jeffrey Lorberbaum -- Chairman and Chief Executive Officer

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 the 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 continue to execute additional pricing across the most product categories to offset ongoing pricing inflation -- 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.

The 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-US 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 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 margin similar to our existing businesses. Some benefits of these projects will be realized next year, the 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 U.S., 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 and premium laminate in Russia.

Even as we address 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, our aggressive strategy to deliver long-term profits and returns. Our Board of Directors has approved a new plan to repurchase $500 million of our company's stock.

With that, I'll turn the call over to Chris to review the segments. Chris?

Christopher Wellborn -- President and Chief Operating Officer

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 are 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 are 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 pickup their products. We are 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 improving the efficiency by our administrative and logistics organization. As an alternative to imports, we are increasing our direct sales to larger customer, who buy in truckload quantities enhancing their supply chain.

To improve our inventory turns, we are presently manufacturing fewer units and 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 are revising our distribution strategy to lower our cost 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 has been the lowest cost alternative from around the world, because of this, our competitive tile position will improve as U.S. sales 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% when 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 have expanded our commercial sales organization to increase specifications and large projects, with designers and end users. We continue to grow the sales of 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 15th, 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 for Mohawk, Eliane strong management team will upgrade manufacturing assets, enhanced product offerings and lower costs.

Margins in our European ceramic business have been under pressure due to lower industry demand and pricing as well as increased inflation. To manage this, we have 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 increased our specifications with the 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 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 new warehouse to improve our service and distribution costs. 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 costs. 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 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 costs 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 are 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 would take longer than anticipated for our margins to improve. 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 continue to capture 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 will 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 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 are 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 operations to improve our efficiencies.

Our Flooring Rest of 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 costs of $8 million. As we move through the quarter, overall market conditions soften. 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 line. 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 water proof 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 in these products. In Russia, a similar laminate production line is starting up and we are 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 47% 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 are 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 have 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 operations with our local Mohawk distribution businesses. We had new carpet tile capabilities to expand our commercial business in both markets and we started supplying raw materials from the U.S. to broaden our product offering and reduce costs. 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.

Frank Boykin -- Chief Financial Officer, Vice President-Finance

Thank you, Chris. Starting with the income statement, sales for the quarter were $2.546 billion, growing 4% as reported with our legacy business, up 2% on a constant basis. Our Flooring Rest of 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 costs 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, when compared to 16.3% last year. Unusual charges during the quarter were $27 million and primarily 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 18.8% from 27.6% as 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 billion, 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 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 Elimination 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 billion, with DSO of 59 days in the third quarter. Inventories were $2.214 billion, inventory days 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 billion 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 $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 remains strong. We have total debt of $2.9 billion with our leverage at 1.5 times debt to total EBITDA. We expect free cash flow of $450 million for the full year of 2018.

And with that, I will turn it back over to Jeff.

Jeffrey Lorberbaum -- Chairman and Chief Executive Officer

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 are 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 of this into account, our EPS guidance for the fourth quarter is $2.45 to $2.60, excluding any one-time 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 is an opportunity to expand, while also impacting the volume, mix and pricing of our other products in the United States. We are 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 proper 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.

Questions and Answers:

Operator

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

Michael Wood -- Nomura Instinet -- Analyst

Hi, thanks for taking my question. Jeff, I wanted to start with getting European 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 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?

Jeffrey Lorberbaum -- Chairman and Chief Executive Officer

We're going through a temporary conditions, where you have inflation and the dollar strength and the market condition, 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 that will take us 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 a 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 to closer to where they were.

Michael Wood -- Nomura Instinet -- Analyst

Okay. And 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 will look like when you begin to last, the heavy de-stocking period in 2Q to 4Q 2019?

Jeffrey Lorberbaum -- Chairman and Chief Executive Officer

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 get worse ends up in the productivity category. We think it will continue to lag in the near-term, but we expect it to improve over time.

Operator

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

Justin Speer -- Zelman & Associates -- Analyst

Thanks guys. I just unpacking the fourth quarter guidance a little bit more and thinking about the big, and particularly in the third quarter, the productivity line, I think, most -- 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 that unpack that Flooring North America pieces, 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?

Jeffrey Lorberbaum -- Chairman and Chief Executive Officer

We anticipate continued soft trends as we go into the fourth quarter, the sales slightly slower, we're 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 increasing prices further in almost every product and marketplace, we're putting our new products that will have higher margins and we're executing cost reductions to improve where we are, but it will take time to change the margin.

Justin Speer -- Zelman & Associates -- Analyst

So, thinking about the price, as 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 the 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?

Jeffrey Lorberbaum -- Chairman and Chief Executive Officer

The cost in most of our product categories demand that we increased the prices and we believe from the announcements of the other competitors that there is increases going on in those. The tariffs will 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 is a reasonable probability they will go in because we don't see the countries reaching a rational compromise. So, as those occur, it should help improve our manufacturing positions in addition.

Operator

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

Stephen Kim -- Evercore ISI -- Analyst

Yeah, thanks very much guys. So, in addition to some of the longer term question that obviously people are going to want to hand holding 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 will be a little lower in the 4Q. I want to clarify, did you mean down year-over-year and I assume you mean down like low single-digit year-over-year in 4Q?

And then on -- but within inventory specifically, I was hoping that you could help us understand, or breakdown what we see in the overall inventory number? It still seems kind of high, in other words, are there big pieces like, was there buildup of LVT ahead of some launches? Was there -- is there any kind of acquisition impact from that inventory that we should -- 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 will come down relatively quickly would be very helpful.

Frank Boykin -- hief Financial Officer and Vice President Finance

First, Steve, I just wanted to clarify, you had said sales will be down in the fourth quarter, is that what you said?

Stephen Kim -- Evercore ISI -- Analyst

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

Frank Boykin -- hief Financial Officer and Vice President Finance

No. No, we don't--

Jeffrey Lorberbaum -- Chairman and Chief Executive Officer

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

Let me get some of it, 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 returns 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.

Christopher Wellborn -- President and Chief Operating Officer

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

Frank Boykin -- hief Financial Officer and Vice President Finance

And that was a long question, did we leave something out there, Steve?

Stephen Kim -- Evercore ISI -- Analyst

Well, in particular, I'm looking for some numbers, either ratios or something that can give us a sense for what we can because that's ultimately what I think the street need is some confidence around your 4Q and 1Q guidance because we're starting to establish a scary pattern here, where we are sort of getting disappointments on guidance. And so, one of the key aspects is your inventory issues continue -- 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 wanted 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 are sort of non-part of the regular flow?

Frank Boykin -- hief Financial Officer and Vice President Finance

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 through next year.

Operator

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

Michael Rehaut -- JPMorgan -- Analyst

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

Just want to understand, what if that's correct, what the differences 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 margin similar to the business with 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?

Jeffrey Lorberbaum -- Chairman and Chief Executive Officer

This 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. So, that's the difference in the two.

All the projects are in all kinds of different states. In the remarks, we sort of talked through there are certain ones that are long in the process, there is 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 things 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 are 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 and depending upon, they are 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 it's 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 take several years to get them to the optimize point.

Stephen Kim -- Evercore ISI -- Analyst

Thank you, 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 this 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?

Jeffrey Lorberbaum -- Chairman and Chief Executive Officer

So, the sales we met 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. And then what was the rest of the question?

Frank Boykin -- hief Financial Officer and Vice President Finance

Rest of the question?

Jeffrey Lorberbaum -- Chairman and Chief Executive Officer

What's the other part, I forgot.

Frank Boykin -- hief Financial Officer and Vice President Finance

All right, we're ready for the next question.

Operator

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

John Baugh -- Stifel -- Analyst

Good morning. Thanks for taking my questions. I was curious on the guide on Q1 improving, I think it was an EBIT guide. Are you seeing that the Q1 EBIT will be above Q4 EBIT?

Jeffrey Lorberbaum -- Chairman and Chief Executive Officer

Guidance, I think, it was saying that the decrease in relative to the prior year would improve over the fourth quarter.

John Baugh -- Stifel -- Analyst

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

Jeffrey Lorberbaum -- Chairman and Chief Executive Officer

There is Q1 is always a much lower volumes in the fourth quarter and I don't think we're going to change that.

John Baugh -- Stifel -- Analyst

Okay. Jeff on LVT and then pricing, I'm curious as to what you're doing, what you're seeing your competition do currently? We've got 10% in place. And then you've got to contemplate if you're importing the stuff, the 25% of this even as early as now. Do you think, if we see materially higher LVT pricing as we go into next year, 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 US?

Jeffrey Lorberbaum -- Chairman and Chief Executive Officer

The tariffs, it takes a while for the marketplace to adjust to the changes. And in the marketplace some people have raised it already and 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.

John Baugh -- Stifel -- Analyst

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, maybe ceramic installed 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?

Jeffrey Lorberbaum -- Chairman and Chief Executive Officer

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 that. And so the product is going to cost more, but the total installed cost should be a benefit and it should cut the times 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 being more competitive.

Operator

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

Keith Hughes -- SunTrust -- Analyst

Thank you. Question on inventory and production rates, on the inventory it was up about 16% year-over-year. Can you 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 slower in the fourth and the third, what do you look in to begin the year, does that flattened out in the first quarter?

Jeffrey Lorberbaum -- Chairman and Chief Executive Officer

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 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.

Keith Hughes -- SunTrust -- Analyst

I'm sorry, you were saying production -- you're lowering your production capacity.

Jeffrey Lorberbaum -- Chairman and Chief Executive Officer

Lowering the production below the selling rate in the third quarter, and then I'm hesitating a little bit. The first quarter is always a slower quarter. So, typically we don't run as hard in the first quarter, in general, just because it's always lower.

Keith Hughes -- SunTrust -- Analyst

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

Jeffrey Lorberbaum -- Chairman and Chief Executive Officer

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 in coming next year, we expect to run rates in line with our selling.

Keith Hughes -- SunTrust -- Analyst

Okay. Thank you.

Operator

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

Doug Clark -- Goldman Sachs -- Analyst

Hey, great. Thanks for taking my question. My first one is on the US LVT facility and then actually the new European one as well. How loaded are those at those at this point? I know you mentioned a 30% increase in capacity, but I guess I'm just struggling 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?

Jeffrey Lorberbaum -- Chairman and Chief Executive Officer

You're dealing with a process that is never been run before and going through. So, what happens is, you start up the plant, running at slow speed 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 work 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, 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, or 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. And 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 increase output with the sales, so you're adjusting the sales strategies and then typically we are also the product mix, when you start is lower and we probably will be working more on the product mix in 2020, as you've gotten it settled down and you're putting in higher value products, the product mix will change as it. So, we won't get the full benefit to sometime in 2020.

Doug Clark -- Goldman Sachs -- Analyst

All right, thanks. 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 cost potentially associated with the sourced product on that?

Frank Boykin -- hief Financial Officer and Vice President Finance

It does not include the accretion from Eliane.

Jeffrey Lorberbaum -- Chairman and Chief Executive Officer

And it doesn't include anything for the tariffs, since we're not sure that what's going to happen. And then as 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 a minute and half.

Operator

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

Kathryn Thompson -- Thompson Research Group -- Analyst

Thank you for taking my question today. First, focusing on margins, and I understand there have been a lot of puts and takes of margin impact in the quarter, by reporting segment and by geography. But first focusing on Flooring North America, which has had the widest and most consistent step-down in adjusted profit margin in 28 this year.

So, stepping back and look 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 for other the other headwinds that you've laid out in the prepared commentary. And really spirit of the question, is understand, what are the internal issue for the controllable versus external? And how these can be managed more effectively going forward? Thank you.

Christopher Wellborn -- President and Chief Operating Officer

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 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.

Jeffrey Lorberbaum -- Chairman and Chief Executive Officer

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 tried to hold price points in the marketplace. And then the other part of it is, we have sold more in lower value category, 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 as it, which is the LVT's impacted the remodeling business at a greater amount.

Kathryn Thompson -- Thompson Research Group -- Analyst

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 -- that would be a fair statement?

Frank Boykin -- hief Financial Officer and Vice President Finance

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

Jeffrey Lorberbaum -- Chairman and Chief Executive Officer

It's a combination of both.

Kathryn Thompson -- Thompson Research Group -- Analyst

Yeah. Just on ceramic. How much of trading down on products in terms of that mix that you talked about, is being impacted by large homebuilder shifting from ceramic product to lower-priced LVT? And do you see this is a trend going forward? And then any thoughts you have about that shift down from a mix shift for ceramic to LVT? Thank you.

Frank Boykin -- hief Financial Officer and Vice President Finance

The margin on ceramic is impacted by LVT 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.

Jeffrey Lorberbaum -- Chairman and Chief Executive Officer

So, part of it is that we are taking a larger share of lower-value products, as the ceramic industry has slowed down. That's part of the mix shift. And then the freight piece that he talks about, the freight part we sell ceramic all landed and we haven't recovered the freight as yet. But we think with the tariffs and pieces, it offers us an opportunity to recover part of the cost.

Operator

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

Matthew Bouley -- Barclays -- Analyst

Hi, thank you for taking my question. 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? Thank you.

Jeffrey Lorberbaum -- Chairman and Chief Executive Officer

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 one day one, they slow in over time, as you go through. So, all those things have made it difficult than usual. And because of the amount of change over time, it's increasing the amount of trading down to lower-priced products to keep the price point is also affecting the mix, which is offsetting a lot of the price increase.

On the ceramic side, the biggest impact is cost of freight is heavy and your movement in the US 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, then we have all year. And at the same time, we 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.

Matthew Bouley -- Barclays -- Analyst

Okay, thanks for the detail there. 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? Thank you.

Jeffrey Lorberbaum -- Chairman and Chief Executive Officer

The productivity is impacted by the unit volumes, but there are also other inefficiencies of things going on, as we go through. We've 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 this year internal costs, which ends up in productivity. So, I think the productivity will improve over time, but it's not going to improve tomorrow.

Operator

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

Mike Dahl -- RBC Capital Markets -- Analyst

Hi, thanks for taking my questions. The first question goes back to the topic of kind of the 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?

Jeffrey Lorberbaum -- Chairman and Chief Executive Officer

We expect to get more price increase in all the different product categories. in every, every dollar we get, helps to improve the margins and offset the raw materials that we have. So, we're expecting that to better align as we go through. We are 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 a piece from where it is today. I don't see that changing, as we try to -- try to operate the business and get whatever share we can in the marketplace, as we go through into 2109. We expect it to be up.

Mike Dahl -- RBC Capital Markets -- Analyst

Okay, thank you. And I guess--

Jeffrey Lorberbaum -- Chairman and Chief Executive Officer

One more thing, part of the up to though with margins, all these new -- new pieces we gone over a few times of how they go. So, in some cases, the volume is going to go up. But the margins is going to lag until the plant hit with the cost structures they need and the mix.

Mike Dahl -- RBC Capital Markets -- Analyst

Well, that's nice. 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?

Jeffrey Lorberbaum -- Chairman and Chief Executive Officer

The business, I think, what we've tried 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 set that the income in the first quarter will be down. Over time we expect the pricing mix and inflation to be better aligned as if. But with the industry pressures across the market would have to improve for us to exceed 2018 earnings next year.

Mike Dahl -- RBC Capital Markets -- Analyst

Okay, thank you.

Operator

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

John Lovallo -- Bank of America Merrill Lynch -- Analyst

Hi, thanks. Thank you for taking my questions. The first one on the CapEx guide for 2019, the 550 to 570 that's a pretty good step down kind of brings you back to 2014, 2015 levels. Now I realized 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?

Jeffrey Lorberbaum -- Chairman and Chief Executive Officer

First is, a portion of that is still paying for those new investments, even though the equipments put in typically you pay for it and some time to make sure it does like it's supposed to. So, there is lags in the investment. So, could be 20% or more of next year's budget is paying for the stuff that's going 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, as it. And then you have the normal maintenance and things you have to invest in as a typical thing, but that's the big chunks of it.

John Lovallo -- Bank of America Merrill Lynch -- Analyst

Okay. And then next question is on just on your $500 million of repurchase authorization put in place. I mean how quickly can you guys get in the market and how aggressive do you intend to be given, where the stock is?

Jeffrey Lorberbaum -- Chairman and Chief Executive Officer

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

John Lovallo -- Bank of America Merrill Lynch -- Analyst

Okay. Thank you guys.

Operator

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

Stephen East -- Wells Fargo Securities LLC -- Analyst

Thank you. The first question, I guess, if you look at your major product categories, how much your 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 stop 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?

Jeffrey Lorberbaum -- Chairman and Chief Executive Officer

If inflation stop 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 are 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.

Stephen East -- Wells Fargo Securities LLC -- Analyst

Yeah, sure. I appreciate that. Okay. And then the other thing I had sort of a compound question. If you look at the US end markets, are you seeing -- could you sort of give us an idea of which ones are behaving the worst, which ones 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 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 2019?

Jeffrey Lorberbaum -- Chairman and Chief Executive Officer

So, you guys are asking the question so long, by the time I get to the end, I get confused what the questions are.

Stephen East -- Wells Fargo Securities LLC -- Analyst

Okay, yeah exactly. The first one is the U.S. end-markets, what are you seeing?

Jeffrey Lorberbaum -- Chairman and Chief Executive Officer

Okay, the US markets. What's happened is that a large part of the remodeling business has been impacted more, so the retail remodeling business, there's more pressure on the other products, as LVT takes a bigger share, and that one versus the other. So, you're seeing less of it in the new construction and the multifamily business. 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?

Stephen East -- Wells Fargo Securities LLC -- Analyst

The second half just looking at your major products, where your cap 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 had to pull back from say where you were earlier this year?

Jeffrey Lorberbaum -- Chairman and Chief Executive Officer

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 why you see us moving into lower value products, which we might not have taken as much of an prior years of periods, that's compressing, and they're all interrelated.

Frank Boykin -- hief Financial Officer and Vice President Finance

Steve in some cases, like ceramic, we are taking down in the fourth quarter, both in the US and Italy, because its the most economical time to take out inventories for us.

Jeffrey Lorberbaum -- Chairman and Chief Executive Officer

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

Operator

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

Phil Ng -- Jefferies -- Analyst

Hey guys. Can you provide some color how to think about some of the start-up costs for 2019 versus 2018 in 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 or early next year?

Frank Boykin -- hief Financial Officer and Vice President Finance

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.

Jeffrey Lorberbaum -- Chairman and Chief Executive Officer

Can you give him an estimate for next year?

Frank Boykin -- hief Financial Officer and Vice President Finance

I think this year, as we said, it's going to be --

Jeffrey Lorberbaum -- Chairman and Chief Executive Officer

65 to 70.

Frank Boykin -- hief Financial Officer and Vice President Finance

65 to 70. So, could be half of that next year.

Phil Ng -- Jefferies -- Analyst

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

Frank Boykin -- hief Financial Officer and Vice President Finance

I mean, 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.

Phil Ng -- Jefferies -- Analyst

Got it. And Jeff, I just want to confirm, I heard you correctly, you're expecting organic growth to be up next year. But given some these headwinds you called out, you're seeing in the market a couple of price cost. You're expecting legacy EBITDA and legacy EBITDA margin to be down year-over-year in 2019, until most things kind of inflect from here?

Jeffrey Lorberbaum -- Chairman and Chief Executive Officer

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 and 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 is going to be up next year.

Phil Ng -- Jefferies -- Analyst

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

Jeffrey Lorberbaum -- Chairman and Chief Executive Officer

We're going to continue working on the cost of all our businesses and we've taken various actions, someone 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 in production of all the different business.

Operator

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

Susan Maklari -- Credit Suisse -- Analyst

Thank you. My first question is around, there's obviously been some sense that markets have slowed globally, you noted Europe as well as the US. 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 US, or in Europe versus the other?

Jeffrey Lorberbaum -- Chairman and Chief Executive Officer

I'm not so sure my Ouija(ph)board is any better than yours at guessing the future. I can say that, you know, 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 that's going to get better for instance.

In Europe, the first half of the year were 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 growth and particular 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 of what's going to happen.

Susan Maklari -- Credit Suisse -- Analyst

Okay. That's helpful. And then in terms of the Eliane acquisition, Brazil is 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 maybe that can sort of add to your business over time?

Jeffrey Lorberbaum -- Chairman and Chief Executive Officer

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.

Christopher Wellborn -- President and Chief Operating Officer

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

Jeffrey Lorberbaum -- Chairman and Chief Executive Officer

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, as a large market, where ceramic is really strong. And we're hoping that 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.

Operator

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

Laura Champine -- Loop Capital Markets -- Analyst

Thanks for taking my question. 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? How long it took you to recover? And what it tells us about, where we are in the cycle?

Jeffrey Lorberbaum -- Chairman and Chief Executive Officer

So, normally, there's two parts. One is you have, 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. And usually, the inflation amount it doesn't -- isn't as great as this. So, there is more trading down going on. At the same time, you see a channel mix change with us, whereas -- this one's different, as LVT is taking more of the growth in the normal channels. We are getting more volume and 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 recession, we try to optimize our price mix and maximize our margins, when business is good. In 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 is reacting to the situation.

Laura Champine -- Loop Capital Markets -- Analyst

Thank you.

Operator

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

David MacGregor -- Longbow Research -- Analyst

Yeah, thanks. 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 shifting to a greater degree of import sourcing, does it make sense for Mohawk to begin supplying the US market with your foreign capacity. And 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 non-tariff to export platforms that can allow you to more competitively serve all segments of the US market?

Jeffrey Lorberbaum -- Chairman and Chief Executive Officer

Look 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.

And on the other hand, ceramic has high freight. So, it's not that we can't compete, instead 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 -- we try to balance the volume with the pricing that we do.

Christopher Wellborn -- President and Chief Operating Officer

Yeah, 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 US is causing imports to be more competitive than they normally would. But even in the US, we are low cost producer.

David MacGregor -- Longbow Research -- Analyst

Thanks.

Operator

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

Eric Bosshard -- Cleveland Research -- Analyst

Hi, two questions. First of all, the competitive dynamic you're talking about in the US regarding LVT and imports, how do you feel about that happening in Europe in a similar way?

Jeffrey Lorberbaum -- Chairman and Chief Executive Officer

Europe is a totally different market and it reacts different. And then we can't really even talk about Europe as a whole because each country and dynamics and where they're located are different. The US is used by a lot of countries as the dumping ground and has always been. And 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 shift 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 year and a half 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 four, five months from where it has been and we are 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 have been using ceramic in huge quantities for thousands of years, as if it's embedded in the culture, as if. And again each markets are 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.

Eric Bosshard -- Cleveland Research -- Analyst

Great. Thank you.

Operator

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.

Jeffrey Lorberbaum -- Chairman and Chief Executive Officer

We have temporary conditions that we're adjusting to. Our businesses' investments will improve our margins and our profitability over time and our new investments will be optimized, when we get the volume and mix, but 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.

Operator

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

Duration: 82 minutes

Call participants:

Frank Boykin -- hief Financial Officer and Vice President Finance

Jeffrey Lorberbaum -- Chairman and Chief Executive Officer

Christopher Wellborn -- President and Chief Operating Officer

Frank Boykin -- Chief Financial Officer, Vice President-Finance

Michael Wood -- Nomura Instinet -- Analyst

Justin Speer -- Zelman & Associates -- Analyst

Stephen Kim -- Evercore ISI -- Analyst

Michael Rehaut -- JPMorgan -- Analyst

John Baugh -- Stifel -- Analyst

Keith Hughes -- SunTrust -- Analyst

Doug Clark -- Goldman Sachs -- Analyst

Kathryn Thompson -- Thompson Research Group -- Analyst

Matthew Bouley -- Barclays -- Analyst

Mike Dahl -- RBC Capital Markets -- Analyst

John Lovallo -- Bank of America Merrill Lynch -- Analyst

Stephen East -- Wells Fargo Securities LLC -- Analyst

Phil Ng -- Jefferies -- Analyst

Susan Maklari -- Credit Suisse -- Analyst

Laura Champine -- Loop Capital Markets -- Analyst

David MacGregor -- Longbow Research -- Analyst

Eric Bosshard -- Cleveland Research -- Analyst

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