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Mohawk Industries Inc (NYSE:MHK)
Q3 2019 Earnings Call
Oct 25, 2019, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning. My name is Jessie and I'll be your conference operator today. At this time, I would like to welcome everyone to the Mohawk Industries Third Quarter 2019 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 25th, 2019. Thank you.

I would now like to introduce Mr. Ken Huelskamp. Mr. Huelskamp, you may begin your conference.

Kenneth Huelskamp -- Vice President, Investor Relations

Thank you. Good morning everyone and welcome to the Mohawk Industries quarterly investor conference call. Today, we'll update you on the company's third quarter results for 2019 and provide guidance for the fourth quarter. I'd like to remind everyone that our press release and statements that we make during this call may include forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995, subject to various risks and uncertainties, including but not limited to those set forth in our press release and our periodic filings with the Securities and Exchange Commission. This call may include discussion on non-GAAP numbers. For a reconciliation of any non-GAAP to GAAP amounts, please refer to our Form 8-K and the 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?

Jeffrey S. Lorberbaum -- Chairman and Chief Executive Officer

Thank you, Ken. Our third quarter operating results were in line with our expectations, though we're not satisfied with our performance. Our sales were $2.5 billion, roughly flat as reported on a constant basis. Our adjusted operating income for the period was $250 million or 10% of sales. Compared to the prior year, the US dollar strengthened, creating a $35 million impact on our translated revenues. As anticipated, our US businesses presented the greatest challenges during the period, given soft retail demand, the impact of LVT, a stronger dollar and excess ceramic inventories in the industry.

Lower interest rates in the US are positively impacting housing starts and home sales and many believe this could be the beginning of an improving housing market. During the period, duties on imported ceramic tile were increased by an additional 104%, which will largely start shipments coming into the market. Trends in our other major markets weakened, creating a more competitive environment. In most regions, significant political and trade uncertainties are affecting consumer confidence and spending. In response to economic concerns, Central Banks in many countries are lowering interest rates to stimulate growth. We expect the present conditions to persist in the near term and we will further adjust our strategies as needed.

We're progressing on the initiatives to improve our business with the most significant of these been aligning the ceramic production with demand in the US, realigning our North American carpet operations, optimizing our LVT manufacturing and ramping-up our new plants. In addition, we're entering new product categories, introducing innovative product extensions and optimizing our recent acquisitions. We are investing in more sales personnel and marketing to increase our penetration in new and existing products. We continue to streamline our operations to enhance efficiencies and we are leveraging automation and process enhancements to lower our costs.

Our free cash flow for the quarter is up year-over-year and our balance sheet remains strong. Since the beginning of the third quarter, we purchased over 740,000 shares for approximately $91 million under our stock purchase program.

For a review of our financial performance during the period, I will turn the call over to Glenn.

Glenn R. Landau -- Executive Vice President and Chief Financial Officer

Thank you, Jeff and good morning everyone . Moving right into our financial performance and year-over-year bridges. As Jeff shared, third quarter total company net sales were $2.5 billion roughly flat on a constant basis compared to prior year or down 1% as reported. Year-to-date, total company net sales were up 2.8% on a constant basis and flat as reported through the third quarter. Organic growth in legacy businesses was down 2.5% in the third quarter on a constant basis, bringing our year-to-date legacy growth down 1.6% versus the first three quarters of 2018. In terms of earnings, the company's adjusted operating income was $250 million in the third quarter or 9.9% of sales. This is off 242 basis points from the third quarter last year, largely due to weaker ceramic volume as expected. With that said, the company's year-over-year decline in margins improved modestly on a sequential basis by 15 basis points, which represents now three consecutive quarters of improvement.

Bridging from the prior year third quarter, adjusted operating earnings were impacted by one lower overall volume of $16 million, largely in Flooring North America and Global Ceramic and associated market related shutdown costs of $9 million, all in our Global Ceramic segment to match our supply with our demand in order to manage our inventories in the US and increased other inflation of about $19 million due to higher wages and benefits, partially offset by lower raw materials, an erosion in price mix of $15 million largely in our Flooring Rest of the World, segment as input costs have eased and $10 million higher spending in SG&A as other and other due to investments in sales and talent and marketing to drive sales including product rollout initiatives and new start-ups.

Moving to the positive offsets, productivity including lower start-up costs swung positive by $8 million versus last year due to better utilization and non-repeating one-time costs. Lastly, FX translation impact was unfavorable by approximately $3 million. Still at the enterprise level, SG&A per net sales across the enterprise was 17.8% excluding unusual items. Special and unusual items in the quarter consisted of approximately $10 million in restructuring and integration costs, impacting operating income primarily in Flooring North America of which most of us call cash and $65 million or $43 million after-tax writedown of our investment in the Chinese supplier in the other income line as a consequence of the September ruling by the US Commerce Department imposing an incremental 104% countervailing duty on ceramic title, effectively stopping Mohawk purchases from this Chinese entity, with this partial offset by about $8 million due to transactional FX in other income, for a total special and unusual items of $66 million before tax.

Back to our restructuring and integration for the full year, we expect to complete the $94 million as previously disclosed this year plus a further $15 million to $25 million, some of which may fall into 2020. And as we shared last quarter, the cash component of the restructuring of approximately $30 million to $35 million should be recovered in about a year as lower cost. Adjusted EBITDA was $398 million or 15.8% before interest expense of $9 million, which was flat with last year. The effective tax rate for the quarter was 18.3% and is expected to move into a range of 17% to 19% in the fourth quarter, driving full-year guidance down to the 19% to 20% range. Finally, adjusted net earnings per share was $2.75 in the quarter, down from $3.29 or 16% versus last year.

Turning now to the segments. Global Ceramics delivered sales of $916 million, an increase of 4.3% on a constant basis versus last year or 3.5% as reported. Operating income on an adjusted basis was $86 million or 9.3% of net sales, down from 13.4% margin last year, primarily due to weaker demand and higher US inventories associated with duties. Compared to last year, inflation was $18 million higher, driven by higher material costs and wages. Volume was softer by $11 million inclusive of $9 million in downtime. Sales and marketing costs were up $8 million and price mix slipped $2 million. All of this, partially offset by improved productivity and lower start-up costs of $6 million. FX was neutral in the quarter.

In the Flooring North American segment, the business showed better overall performance with sales of $1 billion, down 4.4% versus last year as continued weakness in soft surfaces were partially offset by solid laminate performance and continued significant growth in LVT. Adjusted operating income improved for the second quarter in a row sequentially as Flooring North America earned $84 million or 8.4% of net sales in the third quarter, cutting the year-over-year deficit $20 million versus $47 million in the second quarter. Compared to last year, volume accounted for the majority of the deficit, down $17 million versus last year and inflation the rest of a net $7 million with improved raw material costs partially offsetting higher wages and benefits. Turning positive, price mix, improved $4 million and productivity less reduced start-up cost was also positive.

Moving to Flooring Rest of the World, the segment had sales of $601 million, up 2.5% versus last year on a constant basis, but down 1.9% as reported with legacy legacy sales holding 0.4 [Phonetic] on a constant basis.

Adjusted operating income came in at $89 million or 14.8% in the quarter, off 100 basis points versus last year in a competitive environment. Compared to last year, the business continues to manage well in a more difficult environment, supported by solid LVT laminate and insulation performance. The primary headwind in the quarter was an erosion of price-mix of $17 million, largely offset by relief in overall inflation of $10 million, driven by lower input costs and modest improvements in volume and productivity, totaling $4 million. Additionally investments in sales and product marketing were $2 million higher in the quarter and FX translation was unfavorable by $3 million.

Finally at the corporate level, expenses and eliminations drove an operating loss of $9 million with the full-year estimate holding in a range of $35 million to $40 million.

Speaking now 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 at approximately $2.3 billion or 126 days, flat with the prior quarter and higher year-over-year by $124 million due to the ramp-up of new investments, acquisitions and increased sourced products. Fixed costs for the quarter ended at $4.6 billion, down $100 million compared to the prior quarter and capital expenditures of $125 million in the period, lower than depreciation, which was $145 million and in line with plan. For the full year capex, we are on track to spend about $575 million, which is depreciation, up to $595 million depending on timing. Total debt was $2.8 billion at the end of the quarter, down $300 million since exiting the second quarter with leverage declining to 1.7 times debt to adjusted EBITDA. We also closed our effort to renew our credit revolver for the full $1.8 billion for five years plus two automatic one-year extensions. So wrapping up, the balance sheet is strong and getting stronger with free cash flow of $286 million in the quarter, totaling $572 million year-to-date, giving us line of sight to our expected solid cash year in addition to at $700 plus million.

With that, Chris. I'll turn it over to you.

W. Christopher Wellborn -- President and Chief Operating Officer

Thank you, Glenn. In our Global Ceramic Segment, our businesses around the world are under pressure caused by slowing economies. Excess industry capacities are creating more pricing and margin pressures. In most of our markets. Commercial is outperforming retail as consumers are postponing purchases.

In US ceramic retailers are promoting lower price points consumer shifting to LVT and inventories remain high in the channels. During the quarter, the US imposed increased tariffs on Chinese imports and further anti-dumping duties are anticipated. At these levels, US ceramic purchases will be shifted to manufacturers around the world and should benefit Mohawk and other domestic manufacturers. The excess inventories created by the tariffs will take time to be absorbed in the channel. We expect the US ceramic market to remain soft in the near term and we are taking actions to improve our sales and costs. We are expanding our offering of stone looks and polished tiles and we are introducing additional value collections. We are adding more salespeople in major markets to increase our participation in commercial projects.

We are rolling out new online processes to make our customer ordering and picking up faster and easier. To complement our ceramic offering, we are selling Dal-Tile LVT for commercial applications and will introduce residential LVT collections. We are initiating a limited launch of our new easy installation ceramic tile and we will expand more broadly at the beginning of the year. This patented system cuts the installation time in half with limited expertise and we are receiving positive feedback as we demonstrate the benefits. We are developing new markets for our porcelain roofing and thick landscape tiles which over-time will create new sales channels for our business.

Our new countertop plant in Tennessee is ramping up processes and formulations are being refined and new products are being created. Utilizing state of the art robotics, we have begun manufacturing premium countertops that will improve our sales and mix. We are presently staffed to operate three shifts and we'll expand production further next year.

We have outperformed the Mexican ceramic industry by expanding our product offering and growing our customer base. We are hiring additional architectural reps to increase our commercial sales and enhancing our collections with premium porcelain large sizes and new wall tile products. We are supporting stores exclusively carrying Dal-Tile products and expanding our trucking fleet to improve service and costs.

The Brazilian market is showing some signs of recovery and we have outpaced the market with our premium brand and offering. We have a strong position in the new construction market, which is outperforming residential remodeling. We are replacing an old ceramic line with new porcelain production that is more efficient and will produce larger sizes when operational early next year. To me, present [Phonetic] capacity needs, we have also restarted two previously idle lines. The European ceramic industry has slowed with the overall economies and lower exports to other region. Excess industry capacity and inflation is compressing margins as we are selling more lower value tile, which reduced our mix.

Commercial is outperforming residential and we are leveraging our comprehensive offering, expanding our specification team and adding showrooms in major cities to grow. Declining consumer confidence is impacting discretionary spending and is compressing the retail remodeling channels. Our commercial technical tile of porcelain slabs and outdoor products are gaining traction and strengthening our higher value offerings. We are reinforcing our leading design with larger porcelain slabs for walls, print and registration that delivers more realistic visuals and slip resistant tiles for commercial applications.

Our Russian ceramic business is the market leader and is gaining share due to our national distribution system owned and franchised stores and project specification teams. Our technology, design, and scale give us the foremost position in the premium category as well as the cost advantage. To complement our tile business, we are constructing a small sanitary-ware plant that should be operational in the first quarter next year.

In our Flooring North America segment, our margins have improved compared to the prior quarter due to increased sales, lower material cost and operational initiatives, partially offset by lower product mix and inflation in labor. The business has been reorganized by product category to enhance our sales, product and operational strategies and execution.

By volume, carpet still represents by far the largest category in the North American flooring market though it's losing share to hard surfaces. Polyester carpets continue to gain share in soft markets, which has reduced our overall product mix. We have completed the expansion of our recycled polyester fiber to support continued growth in the category. We have expanded our offering of multi-colored and pattern carpets as consumer preferences shift from solid colors. We are preparing our new residential introductions earlier this fall, so they can be in the market sooner next year. The realignment of our residential carpet manufacturing will be largely complete in the fourth quarter and will improve our cost, quality and service. We are aligning our operations for lower residential carpet volumes and utilizing our best assets. We have closed higher cost extrusion and dyeing assets and consolidated yarn and tufting production. We have increased automation and upgraded assets to improve our backing in yarn cost. Beyond asset rationalization, we have enhanced our continuous improvement processes to increase efficiencies and process controls.

Our commercial business continues to outperform with carpet tile and LVT growing faster. We are expanding our sales organization and increasing our carpet tile manufacturing. We have broadened our carpet tile offering with new pattern technology with unique visuals and value alternatives. We are launching more flexible LVT options for commercial that provides acoustic advantages and are more comfortable underfoot. During the period, LVT sales outperformed the other categories with demand remaining strong. Our LVT operations continue to improve, production, volume, speeds, and cost. One of our LVT lines is specialized on rigid products while the other is producing flexible products with each providing unique features for different requirements. In September, we set a record for rigid production levels and the flexible line is now running at comparable speeds to our European operations. Our rigid LVT line is focused on the production of SVC [Phonetic] which is the fastest growing category today. We continue to transfer our operational improvements that have been executed in Europe to increase throughput and introduce additional features. We have specific ongoing actions that will further increase our output and lower our cost through the first quarter. To utilize our increasing production, we are introducing new products and features under our best brands for both the retail and commercial markets. Our manufactured sheet vinyl sales continue to grow as we broaden our offering and expand our position in the multifamily and home center channels.

We expanded our waterproof laminate offerings and use our premium laminate collections is extending throughout the home in the remodeling and new construction channels. Our RevWood collection is providing a desirable alternative for both LVT a natural wood with its superior scratch and dent resistance state of the art visuals and greater value. We have developed proprietary technologies so that our laminate better replicates real wood and has superior water resistance. To support our laminate business, we are upgrading our HDF manufacturing to increase our capacity and improve our cost.

In a slower environment, our Flooring Rest of World segment delivered solid results driven by product innovation, cost improvements, new businesses and acquisitions. Our new LVT sheet vinyl laminate and carpet tile operations are making progress in reaching our expected levels. In laminate, we outperformed the market as our new premium products with waterproof features gained momentum and improved our mix. We have introduced a signature collection, which sets the standard for the most realistic visuals and we are adding our waterproof technology to most of our products. We have further increased our direct distribution footprint with the acquisition of our Eastern European distributor. Our direct distribution strategy positions us closer to our customers and provides them with greater service and value.

Our Russian laminate expansion is operating at expected levels and our sales are growing as we expand our customer base. As our LVT production increases, we are expanding our product offering and sales to grow all segments of the market. In rigid, we are introducing new collections with vast and registration to utilize our increasing capacity. We continue to enhance our line speeds, yield, and formulations to improve our cost position. This process will continue into next year when we anticipate achieving our planned production rates and cost. To increase our distribution, we are offering retailers fashionable products with better value service and inventory turns to enhance their results.

Our sheet vinyl business is performing stronger as our new Russian planning expand sales and volume increases. The new plan has freed up capacity in Europe, so we can expand our offering and customer base.

Our insulation business is performing well with volumes at historically high levels. Our margins remain good even though pricing has declined along with lower material costs. Our panel business has slowed, reducing our pricing and volume, partially offset by mix and lower materials. To further improve our cost this year, we are expanding our internal glue production. Next year we will increase our use of recycled wood and start up a new plant that generates energy from waste wood.

In Australia-New Zealand, the integration of our acquisition is largely complete. While the regional economies have soften, interest rates have been reduced and there are some signs of an improving housing market. To increase our market share, we are upgrading our hard and soft surface product offerings. We are investing to expand our retail distribution and commercial carpet tile production. We have completed the closing of high cost assets in Australia, which will benefit our results moving forward.

With that, I'll return the call to you, Jeff.

Jeffrey S. Lorberbaum -- Chairman and Chief Executive Officer

Thank you. We see the present market conditions continuing and we are taking actions to better position our business for the future. We're investing more in sales and marketing to expand placement of our products and increase the utilization of our new plants. Our new greenfield projects will progress as sales and costs improve. Our LVT productions improving and increased distribution will follow. Our US and European ceramic businesses are being impacted by lower market demand and we are reducing inventory levels, expanding product offerings and entering new categories. The restructuring of our US carpet operations will be substantially complete this year and will benefit our costs next year. Taking this into account, our EPS guidance for the fourth quarter is $2.13 to $2.23 excluding one-time charges. We will adapt our business strategies to the future circumstances as required. Next year, our business will benefit from our new products, higher utilization of our start-ups and cost reductions we have taken in 2019. Our results and balance sheets and improve with strong cash generation to take advantage of future opportunities. We have a strong global management team and they are focused on enhancing our results and optimizing our long-term profitability.

With that, we'll be glad to take your questions.

Questions and Answers:

Operator

[Operator Instructions] Your first question comes from the line of John Baugh with Stifel. Your line is open.

John Baugh -- Stifel Financial Corp. -- Analyst

Thank you. Good morning. And I wanted to focus on the North American revenue performance, which I think was down just a little over 4% in the quarter versus the prior quarter, second quarter where it was down 7%. Is there any way you could give some more detail on sort of what drove that in terms of laminate versus LVT and then carpet down about similarly I guess and then also where we sit today in terms of sourced LVT sales versus produced and I appreciate the record comment, but rigid production, but I'm not sure how to quantify that. Thank you.

Jeffrey S. Lorberbaum -- Chairman and Chief Executive Officer

The carpet industry remains under pressure and is losing share. The industry declined about 7% in units with commercial outperforming residential pieces. We see housing sales remodeling could improve as we go forward. The LVT manufacturing -- other businesses, the laminate business is doing well as we introduced new products that are filling in to different markets and satisfying all the different markets and acting as an alternative to the other waterproof products in the category. The LVT continues to increase as the sales goes up -- as the production goes up, we're increasing new products into the marketplace with different visuals and performance features, which will help us more next year than immediately as we go through. We think the throughput of the plants are going to keep going up and we're aligning new customers to use it next year as we go forward.

John Baugh -- Stifel Financial Corp. -- Analyst

Jeff, on laminated, I thought I heard in their particle board expansion, was that right? Is that in the US or in Europe. I have been worried a little about the US laminate production rates and it sounds like it's reasonably strong.

Jeffrey S. Lorberbaum -- Chairman and Chief Executive Officer

In the US, it's HDF board which will make the core products in. We have exceeded the capacities of the plants. So we are upgrading them in order to increase the throughput and lower the cost to support the business.

W. Christopher Wellborn -- President and Chief Operating Officer

John, just also comment that premium laminate is growing as an alternative for would and LVT while the lower-end laminate is declining. The technologies we use that make it very realistic as an alternative to wood, it has superior visuals, scratch-resistance, water resistance. So we're doing quite well.

John Baugh -- Stifel Financial Corp. -- Analyst

And then just lastly, quickly Chris, so what can you see or discern in terms of industry ceramic inventory in the United States. Where do we sit? Is that getting better. I appreciate you won't see a benefit until we get into 2020, but is there any improvement?

W. Christopher Wellborn -- President and Chief Operating Officer

Yeah. I think it's a good idea to first explain the difference between our company and the industry, but let's answer your question first, the industry. We don't really know exactly what the inventory level shows. We only see import volume, not the actual inventory. What we know is that this year the Chinese inventory spiked in front of these tariffs and our customers are telling us that they have a lot of inventory. Going forward, that will be an opportunity for us as those Chinese inventories deplete. We have options to replace those with our internal production and we have a very short supply chain, which should put us in a good position as the industry inventories deplete.

John Baugh -- Stifel Financial Corp. -- Analyst

Thank you and good luck.

Jeffrey S. Lorberbaum -- Chairman and Chief Executive Officer

Thank you.

Operator

Your next question comes from Stephen Kim with Evercore ISI. Your line is open.

Stephen Kim -- Evercore ISI -- Analyst

Thanks very much guys. I appreciate it. Encouraging signs, particularly in Flooring North America. I just wanted to make a comment as well as a question. My comment both about making permanent adjustments in capacity. First, a comment. You've been implementing what I would call a formalized restructuring program in carpet this year and you've given a lot of qualitative commentary about the rationale and the actions you're taking, but unlike we get with a lot of other public companies restructuring plans, the street hasn't had a set of quarterly numbers to model with and track your progress [Technical Issues]

Jeffrey S. Lorberbaum -- Chairman and Chief Executive Officer

We lost you for a minute.

Stephen Kim -- Evercore ISI -- Analyst

I apologize for that. I guess what I was saying is that we don't get from you a good sense of in this carpet restructuring, what the ultimate annualized savings opportunity is and how much should land in one quarter. And I think if you could do that, I think it would really help investors with the medium to longer term opportunity prognosis or making that projection. And so in a related way, my question is in ceramic. What would you need to see Chris with respect to your assessment or your ability to assess the supply demand in the industry, to embark on a restructuring program in ceramic, will you take out some older capacity to accelerate the inventory decline, much like what you are currently doing in carpet?

Jeffrey S. Lorberbaum -- Chairman and Chief Executive Officer

Okay. Yeah, I can answer that. So this is what we have going on. In our Global Ceramic, generally we have slower economic conditions and greater competition in the market. If you look at the US, it's mostly impacted by LVT growth, excess inventory from tariffs and a stronger dollar. And if you look at Europe, it's impacted more by a slowing economy and lower exports to other regions. And in that environment, as you know, which we expect to remain for some time, we have taken actions to reduce our inventories and that's contributed to the favorable cash flow that you see. Now going forward, we're taking a lot of actions to improve our business. We are adding salespeople, while we're continuing to reduce our internal costs, we're introducing products that are alternatives for imports, we're introducing -- pioneering really new easy installation tile roofing and outdoor products and what we're looking for then is we've got our inventories in good shape, we will by the end of the year, we're about to ramp up with all of these new products and salespeople and we have I think opportunity to take share from these imports. And I think as you go through the year, our hope is that these things kick-in and that we are able to use our capacity.

Stephen Kim -- Evercore ISI -- Analyst

Got it. So we really shouldn't be expecting a significant restructuring where you're taking capacity out because you think your inventories are going to be pretty much in good shape by the end of the year?

Jeffrey S. Lorberbaum -- Chairman and Chief Executive Officer

Yeah. Our inventories will be in good shape and we think we have opportunities to grow the business.

Stephen Kim -- Evercore ISI -- Analyst

Yeah, that's very encouraging. I appreciate it. If I could just follow-on in terms of LVT in Europe, you made some comments about when we went down there recently, Jeff I think you mentioned that 90% of the market over there in LVT is actually flex LVT, not rigid LVT and I just wanted to clarify from your press release, it sounded almost like you could make more rigid product over there than you can sell and so you're increasing your sales force over there. So that was a little surprising, because it sounded almost like that means that when you started making the facility, building the line that since that time the market for rigid in Europe grew slower than you thought while in the US obviously the market has grown way faster for rigid. So I'm just wondering if you could clarify that.

Jeffrey S. Lorberbaum -- Chairman and Chief Executive Officer

Yeah. The market in Europe is still primarily flexible and there is click and non-click. The rigid is a relatively limited share of the total market, but we think it's going to grow quickly. Our equipment that we put in will make either or as you go through. So we're introducing new products in rigid and we're going to try to push the market to sell more rigid as we go, but our [Indecipherable] will make both. The other side is the marketplace is also selling much less of it, it has about half the market share in Europe it does in the US and the growth rates less than half also. So the markets are nothing alike.

Stephen Kim -- Evercore ISI -- Analyst

Got it. Thanks very much for that. I Appreciate it.

Jeffrey S. Lorberbaum -- Chairman and Chief Executive Officer

Thank you.

Operator

Again we ask that you please let me yourself to one question. Your next question comes from Michael Rehaut with JPMorgan. Your line is open.

Michael Rehaut -- JPMorgan Chase & Co. -- Analyst

Thanks, good morning everyone.

Jeffrey S. Lorberbaum -- Chairman and Chief Executive Officer

Good morning.

Michael Rehaut -- JPMorgan Chase & Co. -- Analyst

Yeah. First, I just wanted to hit on just trying to get a sense of the progress with LVT and obviously you mentioned some encouraging factoids about the September production of rigid and also matching the European production. When you look at the incremental lines that you put together over the last year and as they've been ramping, where would you peg the capacity utilization of those lines given the progress that you've highlighted so far on your press release today, in your comments. How should we think about the capacity utilization? Is it of the two lines in the US and Europe, are we talking about 75% or greater and similarly from a margin standpoint, how should we think about what margins those -- that production is producing. Is it still below average or if it's at a higher level of capacity utilization, is it more in line with the corporate average?

Jeffrey S. Lorberbaum -- Chairman and Chief Executive Officer

You have to separate US and Europe and the different pieces. The US business is utilizing all the capacity as it's running now and as it speeds up, we have avenues to use it as well as to substitute other product categories we have as it ramps up. In Europe, we don't source any products. So as it ramps up, we have to build the sales for it in front of it and you have to put the products in the marketplace. So in Europe, we're going to get ahead of the production rate. We're going to get ahead of the sales rate and it's going to have to catch-up in the interim. In the costs, none of the costs are where we want them, because we don't have the throughputs and the material formulations where we want them and we've said we have ongoing programs week to week and I will go into next in the first of next year and we expect to hit our targeted cost structure some time as we go into next year. The other part is the mix on the products and the product mix, you start out with selling the products to use the capacity and then over-time you try to move the product mix up by selling higher value products, which takes time in the marketplace.

Michael Rehaut -- JPMorgan Chase & Co. -- Analyst

Okay, that's helpful. I appreciate that, Jeff. And I guess just one other one if I could squeeze one in please. On the price mix, I believe you said that it kind of netted out roughly neutral, maybe just a slight headwind year-over-year. I wanted to get a sense of sequentially how you're looking at price-mix, how it went from 2Q to 3Q in each of the segments and if that's still kind of a moving target and obviously there's been some slippage there. I was hoping if you could address each of these segments directionally, sequentially where price mix, particularly mix has trended in 3Q and how you see that playing out for the rest of the year?

Jeffrey S. Lorberbaum -- Chairman and Chief Executive Officer

Listen, a general, all the businesses, the price mix is declining as the volume and the different categories are under pressure and as people -- as our customers tend to use price to attract consumers on one hand and on the other as we tend to sell more lower-value products to utilize the plant tighter. So they are all going lower.

Glenn R. Landau -- Executive Vice President and Chief Financial Officer

Yeah. I'd add to that is that for the enterprise, it's lower like Jeff said, it's $15 million, but that's largely in Flooring Rest of the World but that's with a lot of input cost easing. So I think offline we could bridge quarter by segment, but the theme is essentially that is that there is competitive marketplace out there.

Michael Rehaut -- JPMorgan Chase & Co. -- Analyst

Thank you.

Operator

Your next question comes from Phil Ng with Jefferies. Your line is open.

Philip Ng -- Jefferies LLC -- Analyst

Hey, guys. In the last 18 months or so, you've obviously had a lot of headwinds whether it's drawn-down production with the downdraft in demand, price cost and start-up costs, weigh on profitability. When you kind of look at 2020, do you expect these headwinds to moderate and some of the self-help initiatives kind of kick-in and drop through to the bottom line where margins could actually be up year-over-year next year. It would be helpful kind of tie all that together.

Jeffrey S. Lorberbaum -- Chairman and Chief Executive Officer

The market in general as we keep talking about is under pressure and we keep aligning the businesses with the markets. As we look forward, you see us investing more in sales and marketing to increase our share of both in existing products as well as to get these new factories up and running. The positive pieces are the North American restructuring is going to start benefiting the business next year. The LVT lines will be operating more efficiently. These other plants we're talking about will start adding value versus being a drag on the pieces and the marketplace will have to keep reacting to whatever happens.

Philip Ng -- Jefferies LLC -- Analyst

Got it. And just one last one. Chris, I believe in the call you mentioned that you expect your inventory on ceramics to be in pretty good shape by the end of the year. If that's the case, obviously the back half of this year you've had a big drag on production curtailment for ceramics. Should that be kind of like a neutral event when you think about early next year then?

W. Christopher Wellborn -- President and Chief Operating Officer

Well, I think -- as we next year -- as we go into next year, we've got all these things to drive our business and how we utilize that capacity will really depend on how fast they ramp up.

Philip Ng -- Jefferies LLC -- Analyst

Okay, thanks a lot. I appreciate the color.

Operator

Your next question comes from Michael Wood with Nomura Instinet. Your line is open.

Michael Wood -- Nomura Instinet -- Analyst

Hi, good morning. Wanted to shift gears to carpet, particularly in nylon. I'm curious how small that's become as a portion of your mix in carpet. And can you scale operations in nylon specifically enough to achieve the required returns that you have.

Jeffrey S. Lorberbaum -- Chairman and Chief Executive Officer

The nylon part of the business has declined in residential and we have another category that we compete against nylon what we call SmartStrand which is made out of triexta. Both of those things compete in the higher end of the business and we have a much larger business in triexta than we do a nylon in the residential category. On the commercial side, you have the nylon makes up the majority of it and still does and it isn't changing.

Michael Wood -- Nomura Instinet -- Analyst

Got it, OK. And could you also just talk briefly about how you're running promotions in ceramics, in terms of like how that would actually phase out once the inventory gets worked down? Thanks.

Jeffrey S. Lorberbaum -- Chairman and Chief Executive Officer

Well what we're doing in ceramic in some cases we're running promotions with income -- we value engineered products to go after builder business that was -- where they were previously using LVT. So that's one product that we have offered. We also have products aimed at getting the product, the Chinese product that will start coming into the United States, so those are the two main areas.

Operator

Your next question comes from Keith Hughes with SunTrust. Your line is open .

Keith Hughes -- SunTrust Robinson Humphrey -- Analyst

Thank you. Questions in ceramic. I think you had said it was $18 million of higher input cost in the quarter. We've seen that for a couple of quarters now. Specifically, what product or what inputs are driving that up?

Jeffrey S. Lorberbaum -- Chairman and Chief Executive Officer

Well, in particular in South America and in Europe we had higher cost for energy [Indecipherable].

W. Christopher Wellborn -- President and Chief Operating Officer

And then also the material -- in a global marketplace in the different places around the world, there is inflation in energy and there is inflation on raw material still occurring in most of the markets.

Keith Hughes -- SunTrust Robinson Humphrey -- Analyst

And if we look back at 2018 ceramic incurred about like a $100 million of higher inputs. Was it the same sort of things or was it different last year?

Glenn R. Landau -- Executive Vice President and Chief Financial Officer

Mainly the input cost globally like Jeff said has been in energy, materials, labor and in several areas.

Jeffrey S. Lorberbaum -- Chairman and Chief Executive Officer

And one more. On the material costs in ceramic in some cases there is trucking costs that have also gone up to move the stuff to the plans, which has also impacted material costs.

Keith Hughes -- SunTrust Robinson Humphrey -- Analyst

Okay. And I guess final question for Chris. You've been in this industry for a long time. It's going to be two years of just tremendous input cost inflation. Have you ever seen anything like this before?

W. Christopher Wellborn -- President and Chief Operating Officer

Well, I think the thing that, as Jeff mentioned, one of the cost that really ramped-up last year was the transportation cost. That was a significant cost increase and also the material cost, we had both of those.

Keith Hughes -- SunTrust Robinson Humphrey -- Analyst

Okay, thank you.

Operator

Your next question comes from Truman Patterson with Wells Fargo. Your line is open.

Truman Patterson -- Wells Fargo Securities -- Analyst

Hi, good morning everybody. First, just wanted to touch on your fourth quarter EPS guidance. Backing into it, it looks like that implies your operating profit is going to decline about 20% year-over-year on much easier comps than the second quarter. So it seems to me that operations look like they're going to take another step back in the fourth quarter. Could you just maybe walk us through what's the largest buckets of what's causing this. And in that it also appears that I hear the improvement in LVT North America and making some capacity rationalization, but it seems like implied in that guidance that North America margins might even take a step back as well in the fourth quarter. Just hoping you can help me wrap my arms around this.

Glenn R. Landau -- Executive Vice President and Chief Financial Officer

Yeah. I mean I think the message here -- and this is Glenn -- is essentially the fourth quarter is playing out as we expected. The dynamics in the fourth quarter are the same as the dynamics in the third quarter and the biggest is in ceramics in volume and ultimately that and the downtime we're taking against that volume to manage our inventories in the US. So those are the two key buckets that build that guidance. There's really no more new issues. It's just a seasonally different quarter and different amount of days and from there, fill in the blanks.

Truman Patterson -- Wells Fargo Securities -- Analyst

Okay, got you. And thanks for that. Digging into North America a little bit more. They bumped up margins, bumped up 200 bips sequentially. If you look historically, that works kind of in line to maybe a little bit below the normal improvement. If you look at a couple of years, it looks like margins are backsliding a little bit further. You're mentioning positives in the North America carpet restructuring that should benefit 2020. You've got better LVT manufacturing. We've also been hearing [Indecipherable] still some excess inventory, there is some increased promotional activity, capacity rationalization. I'm really thinking when you roll all the puts and takes up, should we expect third quarter margins to really be the floor and we can ramp up and improve through 2020 or do you expect the pressures to kind of more than offset the positives and possibly a flat to down margins?

Glenn R. Landau -- Executive Vice President and Chief Financial Officer

Yeah. I would think of -- this year is over, we're talking about 2020 right now. I think the [Indecipherable] transitional, the dynamics are the same. It's the fourth quarter, but certainly as we've outlined, we're going to have a tailwind in the things we can control in Flooring North America and LVT will turn profitable as Jeff said that we'll get the benefits from restructuring and outside of economic conditions where there is a tailwind to improve margins from where they are today.

Truman Patterson -- Wells Fargo Securities -- Analyst

Okay, thank you.

Operator

Your next question comes from Tim Wojs with Baird. Your line is open.

Timothy Wojs -- Robert W. Baird & Co. -- Analyst

Yeah. Hey everybody. Good morning. Just maybe shifting gears to the cash flow statement. I guess first any sense for what preliminarily cash capex might look like in 2020. And I guess secondarily, how are you kind of thinking about just kind of using or kind of utilizing just some of the increased free cash flow that you should generate in the back half of this year and into 2020. I'm just wondering, you probably won't pay down debt, you've done a couple of acquisitions, but is there an increased emphasis on potentially using some of that cash to buy back stock?

Glenn R. Landau -- Executive Vice President and Chief Financial Officer

The capex next year will be less than depreciation. The biggest part of it's going to be spent on projects that have good paybacks and reducing our costs in each pieces with limited risk in them and we think we have a number of those identified and able to do. On the stock buyback, we are going to complete the stock purchases over-time as we have said and we haven't made any plans to add to it. We will decide that in the future when we get there.

Operator

Your next question comes from Justin Speer with Zelman & Associates. Your line is open.

Justin Speer -- Zelman & Associates LLC -- Analyst

Hi, good morning guys. Thank you. Just wanted to take a look under the hood at Flooring Rest of World and the Global Ceramic business. You've touched on quite a bit. But we have this softer international market conditions. Can you give us a sense for how you see profitability trending in those segments as we look into the fourth quarter, particularly in 2020 given what you're doing in terms of productivity given what you see because Flooring Rest of World business has been pretty sound, little weaker into the third quarter, but just give us a good sense for how you view that business casting into 2020?

Jeffrey S. Lorberbaum -- Chairman and Chief Executive Officer

So when you look at Flooring Rest of World of the European economy is slowing a little, but each of those countries and markets are different and our businesses are performing well in each of them. Our investment and innovation cost and new businesses are enhancing our results and we're well positioned in each of those categories. Laminate LVT and sheet vinyl are performing the best and our new operations are making progress. That would be on the the Flooring Rest of World.

And on the ceramic side, I think it's just like we talked about. So far Europe has been affected by slowing economy, particularly Italy, Germany and also the European ceramic business has been impacted by lower exports to other regions. Now, in that context, we're managing our business well, commercial is doing better and just like in the US, we are increasing our sales organization and new showrooms and we're also selling more mid and low-end product to increase sale. So we're doing a lot, but we think the economies will still be relatively weak.

Justin Speer -- Zelman & Associates LLC -- Analyst

Okay. So in terms of line of sight in the inventory management, feel good about the direction, feel good about some the investments you're doing to kind of rev up growth, but I'm still trying to get a sense for and do you think that Flooring Rest of World margins and I know it's doing relatively well, but in view of -- if trends remain soft as they are, do you think margins will be stable with where they're casting this year as we think about next year?

Jeffrey S. Lorberbaum -- Chairman and Chief Executive Officer

We have also these new projects coming on. You have LVT that the line is going to change from a drag to a positive. You have Russian sheet vinyl plant, it's come up and it's going to slip to a positive, you have the laminate businesses, which we put investments in a while that they're running well and using the capacities and we have put more capacity in Russia and it's doing OK, but there are drags from the economy, so you have the economy drags on one side and you have the various positive things we're doing on the other. We'll have to see how they all balance out.

Justin Speer -- Zelman & Associates LLC -- Analyst

Excellent. And then lastly kind of line of questioning on Flooring North America. I know you saw -- we know source LVT and we know you're bringing up your internal production, but you're still sourcing quite a bit of LVT from where I understand. We have the tariffs in place. Just thinking about the implication of the tariff on that source product on your North American margins this year and potentially in the next year and in terms of that business, looking separately after that at price-mix input cost and productivity, what was that in the quarter and what's expected going forward?

Jeffrey S. Lorberbaum -- Chairman and Chief Executive Officer

I'll just make one comment on the tariffs. On the Flooring North America, it's not been nearly the issue that we had in ceramic. In ceramic, the tariffs are 130%, in North America they were 25%, some of which was discounted back. So I don't think the tariffs have been such a big impact.

W. Christopher Wellborn -- President and Chief Operating Officer

It's been an impact, but not as great. You have the Chinese currency got weaker and the suppliers absorbed a portion of it as you go through and we're in the same position as the rest of the market and there's also production moving -- trying to move to other places to be made. So we're in the same boat as everybody else.

Justin Speer -- Zelman & Associates LLC -- Analyst

Okay. And then just in terms of the price mix, input cost, and productivity in Flooring North America, can you relate what those were in the quarter and what's expected going forward?

Unidentified Speaker

Yeah. As I said earlier, price mix turned positive and productivity when factoring start-up costs also were positive. So yeah, we have the volume challenges, but from a mix standpoint it was the biggest driver, keeping the overall segment across the categories in a flat to positive mode of about $4 million.

Justin Speer -- Zelman & Associates LLC -- Analyst

Excellent. Thank you, guys. I really appreciate it.

Operator

Your next question comes from Mike Dahl with RBC Capital Markets. Your line is open.

Michael Dahl -- RBC Capital Markets -- Analyst

Thanks for taking my questions. First question is really focused on the European environment. And one of your competitors earlier this week talked about how they were seeing excess Chinese LVT capacity and how that was starting to appear in Europe and caused some disruption in Europe as they entered the market. Can you comment to what extent you've seen LVT imports into Europe pick-up and have an impact on your business?

Jeffrey S. Lorberbaum -- Chairman and Chief Executive Officer

LVT from China has increased as the market has increased. We believe we are positioned to compete against it. In Europe, we're manufacturing all of the products we're selling and as our new line comes up and our cost come down, we think that we can offer retailers or buyers of the product competitive products with much shorter lead times and more flexibility and we think we can increase our position in the marketplace.

Michael Dahl -- RBC Capital Markets -- Analyst

Okay, got it. My second question is two parts on ceramic. The first is just a little more color on the impairment on the Chinese asset post the anti-dumping ruling. Can you just talked about how much you were importing through that business and whether or not there is a go-forward impact on how we should think about sales and margins in the ceramic segment as that's been impaired and potentially redirected? And the second part is bigger picture around ceramic. I know you talked about the inventory levels, specifically to the Chinese ceramic but as you've had the anti-dumping go into effect, what are you seeing in terms of import activity from other countries is taking that place and and how do you stack up competitively compared to that?

Jeffrey S. Lorberbaum -- Chairman and Chief Executive Officer

Okay. So firstly, the investment that we wrote-off is something that we've had since 2010. It's a factory where we brought imported products and that has slowly decreased over-time and that production can be brought into our US factories. So that's the only story about the that investment. The Chinese inventories, they spiked. As those tariffs were about ready to be implemented. the last wave, let's say Chinese inventory was brought into the system and that will slowly work its way down. Now what will happen is that source of supply will get replaced by, US manufacturers will be part of it, but it will also impact Brazil, Turkey, India and right now that's being made a little easier because the dollar is so strong, but we should benefit, us and US manufacturers should benefits from some of it.

Michael Dahl -- RBC Capital Markets -- Analyst

Okay, thank you.

Operator

Your next question comes from Matthew Bouley with Barclays. Your line is open.

Matthew Bouley -- Barclays PLC -- Analyst

Hi, thank you for taking my questions. You mentioned kind of seeing those signs of the residential market improving in the US. How should we think about how that might flow into your business timing-wise and if you could remind us maybe which product category is obviously carpet ceramic tile etc. On the home-builder side where you might see kind of the greater benefits of an improving housing market in the US. Thank you.

Jeffrey S. Lorberbaum -- Chairman and Chief Executive Officer

What we said was in the last few months, as you guys get the numbers, we're seeing an improvement in the housing sales and improving in the housing sales should benefit us. If you look at new home sales, flooring is the last thing that's put in before the house is complete. So if it takes nine to 12 months to build a house or 18 months, the flooring is the last thing that's put in it. The different categories -- all the different categories are used in the homes as we go through. We're seeing the increases in all the different categories. I mean increases -- all the different hard surfaces are used in, carpets used in it. And so if it goes up, it should positively impact all of the pieces.

Matthew Bouley -- Barclays PLC -- Analyst

Okay, understood. And then just back to LVT in the US again. I think you mentioned Jeff that you've got some visibility to reduce costs in Q1 and you kind of also mentioned hitting the targeted cost structure at some point next year. Can you just elaborate a little bit on that around the timeline to turning a profit in that plant and what type of margin you can actually do with LVT in the US? Thank you.

Jeffrey S. Lorberbaum -- Chairman and Chief Executive Officer

What we said is that next year we think we will turn a profit in it. We haven't put it by the quarter. In addition as the piece -- as our manufacturing improves, it has to flow through the inventory, so the cost improvement show up about four months later in the cost sheets as you go through. What we expect all through the year for it to keep improving and then even further beyond that we would expect the cost structures to continue to improve incrementally and then over-time you change the mix in the business. To get the business to align, you have to sell it at whatever prices you need to get it into the marketplace quickly and then over-time you upgrade the mix, which will take more than next year as we do it as we go forward.

Matthew Bouley -- Barclays PLC -- Analyst

Okay, understood. Thanks a lot.

Operator

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

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

Hey, guys. Thank you for fitting me in here. Can you just help us think about the magnitude of the sales and marketing investment that you're making to expand the placement of your products and should we expect this to kind of ramp sequentially as we head through 2020?

Jeffrey S. Lorberbaum -- Chairman and Chief Executive Officer

In all the different businesses as you've heard, we're putting more salespeople on and we're trying to be more aggressive in the market places as we go through, so there is a spike in it. We're going to continuing to monitor it. And if we get the positive results, we'll continue spending at those levels. If we don't, we'll adjust the strategy and get it in line.

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

Okay. And then maybe finally, what percentage of your ceramic offers today you would consider to be value-oriented and where do you think this percentage could go over the next year or two?

Jeffrey S. Lorberbaum -- Chairman and Chief Executive Officer

We have price points up and down the spectrum in ceramic and I wouldn't overemphasize these lower price points. We're in selected situations where we have opportunities we're targeting it, because we are under-utilized in our assets, but overall, it's not a huge piece of our production.

W. Christopher Wellborn -- President and Chief Operating Officer

But it will get bigger and it will impact the margins and we're doing the same thing in Europe. We're being more aggressive. As the industry slowdown, we participate more in lower-value products, so it does impact the mix.

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

Got it. Thanks guys.

Operator

Your next question comes from Kathryn Thompson with Thompson Research. Your line is open.

Kathryn Thompson -- Thompson Research Group -- Analyst

Hi, thank you for taking my question today. On carpets in the US last year was somewhat flattish to down a little bit and the overall industry expectation was the worst is behind and the to industry context, [Indecipherable] then very surprised by that just taking such as a bigger like down this year. I wanted to get your thoughts on that dynamic and what realistically are your expectations looking beyond just the next couple of quarters, but what could the next as we look two to three years down the road?

Jeffrey S. Lorberbaum -- Chairman and Chief Executive Officer

If you look at the flooring market in the United States, historically it's grown greater than GDP through the cycle and I don't know what would have changed it that flooring would not grow slightly more than GDP over-time.

Kathryn Thompson -- Thompson Research Group -- Analyst

I was talking about carpet. Carpet is not been growing as fast. So I'm talking about a specific category, not overall flooring.

Jeffrey S. Lorberbaum -- Chairman and Chief Executive Officer

I'm sorry.

Kathryn Thompson -- Thompson Research Group -- Analyst

So we're talking about a secular change.

Jeffrey S. Lorberbaum -- Chairman and Chief Executive Officer

The carpet has been decreasing and we don't see it changing. At the moment, what we believe is that the LVT at some point is going to plateau out. We believe that is probably slowing somewhat at this point from where it was and it will plateau and then things will go back to some sort of growth rate before leveled over the piece, but it's not going to stop tomorrow.

Kathryn Thompson -- Thompson Research Group -- Analyst

Yeah. So just once again, just a follow-up to see if I can clarify. Carpet is taking a bigger step down this year while LVT has been growing at a pretty steady rate. What do you think the percentage reasonably carpet should be two to three years down the line as we look at it as a broad mix?

Jeffrey S. Lorberbaum -- Chairman and Chief Executive Officer

I don't have a number to give you. You can make up one as well -- I don't have a number.

Kathryn Thompson -- Thompson Research Group -- Analyst

Okay. On transportation, obviously the spent -- just -- shortage of drivers has been a thorn in the side for so many industries in construction and in manufacturing. What are you doing to ensure the ability to keep drivers to get some stability with that labor force and the long-term cost for that.

Jeffrey S. Lorberbaum -- Chairman and Chief Executive Officer

We have done a few things. One is that we have increased our internal trucking fleet in order to move a greater percentage of our products. We think that we offer -- we've been able to staff our positions because of the consistency of the routes and the ability for people to make money. So we've done better than the market in general to support our own trucking fleets and we've taken a larger percentage of it, then going on the open market as the cost have increased.

Kathryn Thompson -- Thompson Research Group -- Analyst

Okay, thanks.

Operator

That's all the time that we have for questions. I'll turn the call back to Mr. Lorberbaum for any closing remarks.

Jeffrey S. Lorberbaum -- Chairman and Chief Executive Officer

So we appreciate everybody joining us. We have a lot of actions we're taking to improve the business and our results. We think we have a lot of opportunities as we look going forward and we appreciate you being on the call with us. Have a good weekend.

Operator

[Operator Closing Remarks]

Duration: 67 minutes

Call participants:

Kenneth Huelskamp -- Vice President, Investor Relations

Jeffrey S. Lorberbaum -- Chairman and Chief Executive Officer

Glenn R. Landau -- Executive Vice President and Chief Financial Officer

W. Christopher Wellborn -- President and Chief Operating Officer

Unidentified Speaker

John Baugh -- Stifel Financial Corp. -- Analyst

Stephen Kim -- Evercore ISI -- Analyst

Michael Rehaut -- JPMorgan Chase & Co. -- Analyst

Philip Ng -- Jefferies LLC -- Analyst

Michael Wood -- Nomura Instinet -- Analyst

Keith Hughes -- SunTrust Robinson Humphrey -- Analyst

Truman Patterson -- Wells Fargo Securities -- Analyst

Timothy Wojs -- Robert W. Baird & Co. -- Analyst

Justin Speer -- Zelman & Associates LLC -- Analyst

Michael Dahl -- RBC Capital Markets -- Analyst

Matthew Bouley -- Barclays PLC -- Analyst

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

Kathryn Thompson -- Thompson Research Group -- Analyst

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