Mohawk Industries Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
April 26, 2024

There are 14 speakers on the call.

Operator

Good morning, everyone, and welcome to the Mohawk Industries First Quarter 2024 Earnings Conference Call. All participants will be in a listen only mode. Please also note today's event is being recorded. At this time, I'd like to turn the floor over to James Brunk. Please go ahead.

Speaker 1

Thank you, Jamie. Good morning, everyone. Welcome to Mohawk Industries' quarterly investor conference call. Joining me on today's call are Jeff Lowerbomb, Chairman and Chief Executive Officer and Chris Walborn, President and Chief Operating Officer. Today, we'll update you on the company's Q1 performance and provide guidance for the Q2 of 2024.

Speaker 1

I'd like to remind everyone that our press release and statements that we make during this call may include forward looking statements as defined in the Private Securities Litigation Reform Act of 1995, which are subject to various risks and uncertainties, including, but not limited to, those set forth in our press release and our periodic filings with the Securities and Exchange Commission. This call may include discussion of non GAAP numbers. For a reconciliation of any non GAAP to GAAP amounts, please refer to our Form 8 ks and press release in the Investors section of our website. I'll now turn the call over to Jeff.

Speaker 2

Thanks, Jim. Good morning, everyone. Though economic headwinds are impacting our industry, our results reflect positive effects of the actions we're taking to enhance our performance. Our net sales for the Q1 were $2,700,000,000 down 4.5% compared to last year. Adjusted earnings per share were 2023 as a result of restructuring, productivity initiatives and benefits from lower cost materials and energy, partially offset by weaker pricing and mix.

Speaker 2

Currency exchange rates continue to affect our operating income with a negative impact in the quarter approximately $12,000,000 or $0.15 on EPS. Across our regions, market conditions remain similar to the prior quarter with significant pricing and mix pressure due to industry competition for volume. Those slowing the commercial channel continues to outperform residential. Residential remodeling remains soft due to low housing sales and the impact of inflation on discretionary spending. Retailers have reported that consumers are reluctant to initiate higher ticket projects with flooring facing greater pressure since most replacements can be readily deferred.

Speaker 2

Our teams remain focused on managing through the near term environment, realizing sales opportunities, reducing controllable costs and completing restructuring initiatives. We continue to manage our production levels to align inventories with market demand. To stimulate sales, we're investing in new product introductions with enhanced features that convey the value of our collections. Given inflationary pressures and labor benefits and other items, we continue to take additional actions to reduce our cost structure and improve productivity. Globally, there is optimism about consumer confidence improving, interest rates declining and a rebound in the housing market.

Speaker 2

The timing of this inflection in each market depends on inflation levels and actions by their central banks. Latin America aggressively raised inflation and now the region is among the first to implement rate reductions. Brazil's Central Bank initiated several rate cuts and Mexico recently lowered rates for the first time since 2021. In the U. S.

Speaker 2

And Europe, central banks are maintaining interest rates as they focus on achieving their targeted inflation levels. The present forecast for U. S. New home starts and existing home sales is for a slight increase in 2024 with greater improvement in the second half of the year. In some countries, governments are subsidizing housing investments by reducing mortgage rates.

Speaker 2

In the U. S, builders are stimulating purchases of their properties by buying down interest rates for consumers. The U. S. Realtors Association recently noted that life events eventually require buyers and sellers to make moves regardless of interest rates.

Speaker 2

The desire for homeownership remains strong and people will find a way to realize that goal. Since our last call, Newsweek named Mohawk 1 of America's greatest workplaces for women and GreenBuilder selected our PureTech PVC free resilient flooring as one of their top products of the year. We're pleased to be recognized for both our commitment to our people and our product innovation. Now Jim will provide a review of our financial performance for the quarter.

Speaker 1

Thank you, Jeff. Again, sales were just under $2,700,000,000 that's a 4.5% decrease as reported and 5.5% on a constant basis due to year over year price and mix pressures continuing due to a combination of tight demand, the pass through of lower input costs and the consumer trading down. Our Flooring Rest of the World segment was impacted the most by the price and mix issue in the quarter. Gross margin was 24.2% as reported or 24.4% on an adjusted basis versus 24.1% in the prior year, primarily due to lower cost, material and energy of 147,000,000 dollars substantially offsetting the negative impact of price and mix of $152,000,000 in addition to the benefit of our productivity and restructuring 4% on an adjusted basis, basically in line with the prior year. That gave us an operating margin of 5.5% as reported.

Speaker 1

Non recurring charges were $17,000,000 in the quarter, giving us an adjusted operating margin of 6.1%. That's a slight improvement over prior year driven by the lower input costs of approximately $136,000,000 and increased productivity of $47,000,000 offsetting the negative impact of weaker price and mix of $153,000,000 and the unfavorable impact of foreign currency of $12,000,000 and temporary manufacturing shutdowns of $10,000,000 Interest expense for the quarter was $15,000,000 that's slightly favorable versus prior year. Our non GAAP tax rate is 21.8% versus 22.6% in the prior year. We expect Q2's tax rate to be between 20% 21% and the full year rate to be between 19% 21 percent. That gave us an earnings per share as reported of $1.64 and on an adjusted basis of $1.86 an increase of 6% versus

Speaker 3

the prior

Speaker 1

year. Turning to the segments. Global Ceramic had sales of just over $1,000,000,000 that's a 1.4% decrease as reported and 5% on a legacy and constant basis due to the unfavorable impact of price and product mix and lower volume as the industry demand remains compressed. Operating margin on an adjusted basis was 5%. That's a decrease of approximately 130 basis points due to the unfavorable impact of price and product mix of approximately $40,000,000 reflecting the continued difficult market conditions and the unfavorable impact of foreign currency of approximately $11,000,000 partially offset by lower input costs of $32,000,000 and productivity gains of $14,000,000 In Flooring North America, we had sales of $900,000,000 That's a 5.6 percent decrease as reported due to lower remodeling activity impacting volume as well as pressuring price and mix across our product lines.

Speaker 1

The business improved through the quarter and we are introducing new residential collections with unique features to enhance our carpet, laminate and resilient sales. Operating margin on an adjusted basis was 5.3%. That's a significant improvement versus prior year with favorable impact of lower input costs of $57,000,000 and productivity gains of $23,000,000 as we benefit from our cost optimization and restructuring initiatives. This was partially offset by unfavorable impact of price and product mix of $20,000,000 And finally, flying Rest of the World had sales of just over $730,000,000 that's a 7.4% decrease as reported or 5.9% on a constant basis due to the unfavorable impact of price and product mix, partially offset by an increase in our unit volume even in a generally weak environment across Europe. Operating margin on an adjusted basis was 10.1 percent, decrease of 2 50 basis points, driven by the unfavorable impact of price and product mix of approximately $92,000,000 primarily in our panels business, which has declined substantially compared to the high prior year comps when the industry was running near capacity.

Speaker 1

These were partially offset by lower input costs of $48,000,000 stronger unit volume of $11,000,000 and productivity gains of $10,000,000 Corporate eliminations was $11,000,000 for the quarter, in line with prior year, and our full year forecast is for $45,000,000 Looking at the balance sheet. Cash and cash equivalents were just over $650,000,000 with free cash flow in the quarter of $97,000,000 Inventories were just over $2,500,000,000 dollars with the year over year inventory decrease of about $200,000,000 primarily due to a reduction in cost. Our inventory days were reduced to 100 25 days versus a year end level of 130. Property, plant and equipment were just shy of $4,900,000,000 Our CapEx for the quarter was $87,000,000 with depreciation and amortization of 154,000,000 dollars The company plans to invest approximately $480,000,000 to $500,000,000 in 20.24 with D and A for the full year forecasted to be approximately $600,000,000 Overall, the balance sheet and cash flow remained very strong with gross debt of just over $2,600,000,000 and leverage at 1.4 times. At this point, I will turn it over to Chris to review our Q1 operational performance.

Speaker 4

Thanks, Jim. During the quarter, sales in our Global Ceramics segment remained soft across our regions. The industry is operating below historical levels and market competition to capture volume is affecting both our pricing and margins. Product mix is also declining as higher value residential remodeling channel is softest and those customers undertaking new projects are selecting lower cost options. Reduced energy prices are enhancing our results, though wages, benefits and other costs have increased.

Speaker 4

We continue to execute cost reduction initiatives including utilization of lower cost materials, product reformulations and reductions in SG and A spending. We're driving productivity through increased efficiencies, higher yields and consolidating our distribution network. Our investments in new printing, polishing and rectifying technologies are delivering higher value sales and formats to improve our mix. We are introducing decorative innovations with new glazes, three-dimensional surfaces and updated artisanal mosaics. We are launching larger formats in floor and wall tile and porcelain slabs along with smaller offerings that replicate handcrafted visuals.

Speaker 4

Our broad product offering quality and service advantages are helping us expand business with both new and existing customers. In the U. S, cold weather caused the suspension of operations at a number of our manufacturing facilities and service centers in January, impacting our cost and revenue. Our Tennessee quartz countertop expansion should be completed later this year and we're developing new products and enhanced marketing tools to support our additional capacity. The U.

Speaker 4

S. Ceramic tile industry has filed a petition against India in response to widespread dumping of ceramic tile in the U. S. Market and expects tariffs between 400% and 800% plus additional duties for subsidies. Other countries where we operate are considering similar actions.

Speaker 4

In Europe, we're seeing robust growth in porcelain panel sales after our recent expansion and sales have also benefited from our new smaller and larger sized premium products. European energy prices have moved to lower levels than forecasted, which should benefit consumers. In Mexico and Brazil, we're optimizing our sales and improving our operations. We're implementing new distribution and product strategies in each country, so our brands complement each other in the marketplace. In our Flooring Rest of World segment, markets remain soft despite declining inflation.

Speaker 4

In the quarter, our volumes increased from the prior year's low levels, which may be an indication of improving trends in our categories. Though our results were impacted by pricing pressures as we pass through lower input costs in highly competitive markets. Our Quick Step brand sales improved during the quarter as we aligned realigned price points reflecting lower cost and increased marketing efforts to stimulate demand. We've completed the restructuring of our residential LVT program and are beginning to see the savings we anticipated. The change is delivering substantial growth in our residential rigid LVT, which is replacing our discontinued flexible products.

Speaker 4

In insulation, we've recently experienced material increases and are raising our prices accordingly. In our panels business, margins have declined from our cyclical high comparisons due to the underutilization of industry capacity, partially offset by mix improvement in our decorative collections. We've announced selective price increases in panels to reflect rising material costs. We continue to implement productivity initiatives and cost containment projects across the business, including labor efficiencies, higher yields and alternative materials. We're enhancing our bolt on acquisition in MDF boards, sheet vinyl and mezzanine flooring and we'll complete our premium laminate expansion this In Australia, New Zealand, reduced input cost and increased productivity offset lower pricing and volumes in a slow environment.

Speaker 4

In our Flooring North America segment, our results versus the prior year benefited from declining raw material and energy costs, partially offset by lower price and mix. While residential remodeling was generally weaker overall, market conditions vary depending on channel and product category. Sales improved through the quarter, though many retailers in some of our facilities were temporarily closed in January due to weather. Lower market demand and consumers trading down are creating a competitive marketplace pressuring average selling prices and product mix. Based on builder optimism, new single family home sales should improve through the year, positively impacting our flooring business.

Speaker 4

Commercial sales continue to outperform residential led by the specified hospitality, retail and government channels. Retailers are embracing our new residential product launches including Pet Premier carpet and PureTech resilient planks. We're optimizing sales of our consolidated coordinated accessories and growing our recently acquired rubber trim business. We're increasing the sales of our nonwoven acquisition with new customers and product expansions. Our West Coast LVT facility is increasing production and our Georgia restructuring initiatives are being implemented.

Speaker 4

During the quarter, delivered productivity gains across the segment with operational improvements, better yields and enhanced logistics. I'll return the call to Jeff for closing remarks.

Speaker 2

Thank you, Chris. The flooring industry appears to be at the bottom of the cycle and we are managing controllable aspects of our business to improve our results. We continue to reduce our fixed and variable costs through ongoing restructuring and additional productivity initiatives. We're aligning production with market demand to control working capital, which increases our unabsorbed overhead. To enhance sales and margins, we're upgrading our product offering with unique features and investing in new merchandising.

Speaker 2

This year, we're completing our LVT quartz countertop and premium laminate expansion project to support our products with the greatest growth potential when the market recovers. Our other capital investments are focused on reducing costs, delivering product innovation or maintaining the business. Due to European vacation schedules, our 2nd quarter sales are seasonally higher than the 3rd quarter. Given these factors, we anticipate our 2nd quarter adjusted EPS to be between $2.68 $2.78 excluding any restructuring or one time charges. Residential flooring sales should lead to recovery as consumer confidence improves, the housing market strengthens and postponed remodeling projects are initiated.

Speaker 2

Existing home sales will normalize and are meaningful catalyst for flooring since homeowners replace it more often before listing a property or soon after completing a purchase. Across our geographies, housing has not kept pace with household formations and substantial home construction will be required for many years to satisfy those needs. Additionally, as homes age, increased remodeling investments are required to maintain property values. As the world's largest flooring manufacturer, we expect to significantly benefit from our brand leadership, investments in new capabilities and recent acquisitions as the flooring market recovers. We have the products to inspire consumers, the infrastructure to deliver superior service and the balance sheet to invest in opportunities for the business.

Speaker 2

We'll now be glad to take your questions.

Operator

Ladies and gentlemen, we'll now begin the question and answer session. Our first question today comes from Matthew Bouley from Barclays. Please go ahead with your question.

Speaker 5

Good morning, everyone. Thank you for taking the question. So obviously the trajectory of interest rates is a little different than what the market thought earlier this year. I guess, 2 parts. Are you do you have any different thoughts around how you're thinking about earnings growth for Mohawk?

Speaker 5

I think previously you had expected in the second half of the year that you could see growth year over year. Clearly, it was positive year over year in the Q1. But any kind of thoughts around the cadence of the business into the second half? And then just are you managing the business any differently assuming this different rate environment, capital allocation, managing capacity, any restructuring actions being considered? Any thoughts around how that has evolved here?

Speaker 5

Thank you.

Speaker 2

The recent comments by the Fed that interest rates will stay higher could somewhat impact housing sales and the flooring industry improvement as we go through the year. The industry has been running at extremely low levels and eventually buyers and sellers have to do transactions. People who are not moving should increase remodeling over time and housing sales are expected to increase from their very low levels. At the same time, we anticipated commercial would slow significantly. It's possible it could be better than we expected given the stronger economies at this time.

Speaker 2

We still anticipate improvement in the second half and exceed the results this year.

Speaker 5

Got it. Perfectly. And then I guess maybe sticking with the capital allocation side. You're completing some of your capacity investments this year. What does that mean for capital expenditures beyond 2024?

Speaker 5

And just kind of any additional thoughts around the share repurchase within that capital allocation set of priorities? Thank you.

Speaker 1

First of all, just to remind you, our forecast this year is somewhere between $480,000,000 $500,000,000 That's below D and A of about $600,000,000 About 45% of that is really focused on cost reductions and product innovation, 15% is relatively to complete those growth investments that you just mentioned. And the remaining 40% or so is on the maintenance of the business. Going forward into next year, given the completion of the capacity projects, the focus will be on cost reductions, product innovation and the maintenance of the business unless, of course, we come up with new ideas from a capacity standpoint. In terms of other cash priorities, again, we'll focus on broadening our product offering and innovations around products, identifying acquisitions, whether they be bolt on or acquisitions that would help us get into new markets. And then share buybacks are still being considered as part of that allocation.

Speaker 6

Thanks, Jim. Good luck, everyone.

Operator

Our next question comes from Tim Wojs from Baird. Please go ahead with your question.

Speaker 7

Hey guys, good morning. Maybe just to start, just in the Q1, I mean, pricemix, I think, kind of more than offset some of the raw material improvement or raw material cost improvement that you kind saw in a year over year basis. So, as you kind of think about the next few quarters, how should we kind of model or kind of think about that price mix cadence and maybe just price cost in general as we kind of go through 2024?

Speaker 1

Let me start with some of the assumptions around Q2 that will give us a baseline. As we enter Q2, we are seeing some signs of increasing volume, but are seeing continued price and mix pressure. We expect seasonality to be more aligned with historical levels. We continue to invest in innovative products, process improvements reduction to try to control our costs. Still anticipate that FX will continue to be a headwind as well.

Speaker 1

In terms of material costs in Q2, we would anticipate the benefits from lower costs from a year over year perspective to be offset by that price and mix pressure with flooring rest of the world continuing to be under the most pressure.

Speaker 6

Okay. Okay. That's really helpful.

Speaker 7

And then just, I guess, on the panels kind of price mix kind of commentary, when do the comps there just get easier?

Speaker 4

I think the panels business is going to be under pressure all during this year.

Speaker 7

Okay. So that kind of But

Speaker 6

the cost

Speaker 2

will get less we'll get easier in the second half. Okay. Okay, great. Thanks guys.

Operator

Our next question comes from Susan Maklari from Goldman Sachs. Please go ahead with your question.

Speaker 8

Thank you. Good morning everyone.

Speaker 1

Good morning.

Speaker 8

Jeff, it seems like you are starting to realize more of the benefits of the productivity and the restructuring efforts even with the business continuing to be under pressure. Can you talk a bit about how that can contribute to the margin profile over time? And maybe where do you think that this can go even if the macro remains less supportive?

Speaker 2

Let's start out with the general view by different channels. In the residential flooring sale, always rebound from the low level that they're at. Consumer confidence improves, housing improves. You have to postpone remodeling that hasn't been done in the last couple of years, as they were pressured by inflation. So that comes back.

Speaker 2

We expect, as you said, the mix and average selling prices as the market improves, it actually changes because there's more higher value retail replacement business and it helps the margins. We'll benefit from all the different activities on a continuous basis with the cost reductions, the product investments, the growth initiatives. The different acquisitions that we've made over the past year and a half, we expect them to benefit our results significantly as the thing improves. This will all increase the margins with higher volumes and we'll get leverage in the SG and A and the other overhead costs as well as the increased productivity. So again, coming out of the cycle, we're at a low level, which happened in the last big downturn.

Speaker 2

The first expectation is that we get back to 10% operating income and then continue to expand it further.

Speaker 8

Okay. That's helpful color. And then I guess you mentioned that you still expect to expand in the second half of this year. Just any thoughts on more specifics around how that may come together? What some of the key factors could be, especially as you think about the Flooring North America segment?

Speaker 2

Well, we start out with that we think we're going to have the normal seasonality, which means typically in the U. S, the peak of the year tends to be the end of the second quarter, end of the third quarter. And we think it's going to be more normalized. At the moment, which we've said, the demand still is weak with continued pressure on pricing. So until the volume gets back, we think there'll still be the pressure there along with the mix.

Speaker 2

What else is different? Again, we just assuming that the replacement business, which has been really low, at some point, they have to start if they're going to stay in their houses, they're going to have to start improving them. And then some of the people are going to have to move just because of their lifestyles. So it can't stay at the bottom forever. So we're assuming that even if interest rates don't change a lot that we'll start seeing some of this improvement there.

Speaker 2

And as you look in the other countries around the world, they look like they're going to start lowering interest rates sooner and faster. And the same thing should occur in those countries with consumer confidence and moving forward and doing more remodeling, which is the first thing that picks up.

Speaker 8

Okay. Thank you for that color and good luck with everything.

Speaker 7

Thank you, Susan.

Operator

Our next question comes from John Lovallo from UBS. Please go ahead with your question.

Speaker 6

Good morning, guys. Thank you for taking my questions. The first one maybe just focusing on the second quarter. It seemed I think that previously you'd expected sort of on a year over year basis energy cost reductions offset negative price mix and that productivity would offset wage and benefit inflation. I guess the question is, is that the expectation still for the 2nd quarter?

Speaker 6

And did that happen in the Q1 only in North America?

Speaker 1

Well, first of all, on the Q1, as I said, if I just look at Materials and Energy, it's about $147,000,000 favorable in terms of lower costs compared to the $153,000,000 unfavorable price and mix. The most pressure was seen, as we said, in the Flooring Rest of the World category, and that is the one place where materials and energy did not offset the negative price mix. I would think in the Q2, I would anticipate that trend continuing where the pressure is the highest in flooring rest of the world.

Speaker 6

Okay, okay. Got it. And then just trying to wrap my head around the second half of the year. I mean, should we expect a negative impact from pricing to sort of lap to maybe less of a price mix headwind year over year, but also probably less favorable impact from lower input costs. And then sort of from there, you need volume to drive productivity to offset any additional inflation.

Speaker 6

Is that the right way to think about it?

Speaker 1

Yes, John. That is the right way to think about it. What I would anticipate as you start to lap, the prior year, pricemix will become less of a headwind. Again, we're speaking about year over year. But you're also right, I'm going to start to also lap the lower cost.

Speaker 1

And so that will become less impactful as well. Really, what it's going to turn into is, as we anticipate volume getting a little bit stronger, you'll get a pickup in volume, but you also get a benefit in less shutdown cost as well. And so that will be the focus as we go into the second half of the year.

Speaker 2

Great. Thank

Operator

you. Our next question comes from Phil Ng from Jefferies. Please go ahead with your question. Hi, good morning.

Speaker 9

This is actually Colin on for Phil. I just wanted to start on the commercial piece. You noted that the commercial continued to outpace residential, but that's slowing. Are volumes higher year over year in that commercial business? And then how are you thinking about your commercial flooring volumes as we move through the end of 2020 4?

Speaker 9

And then maybe just remind everyone of the size of that commercial business for each of your segments?

Speaker 2

What we said was that the commercial business is holding up better than we had anticipated. We thought that it would fall off faster than it has and it is we're performing better than we thought. We still think it's going to continue slowing through the year as new projects haven't been initiated in the last year. So we're still anticipating it slowing. In commercial, you also have pricings more resilient since the products are more unique.

Speaker 2

So you don't have as much price pressure. And presently, the hospitality, retail, government channels are outperforming. And just as a comment on the backside, when we start getting better, it's going to take longer for the commercial to improve because it takes a longer time to get the planning approvals and construction to begin in the business.

Speaker 1

Anything else you want to give? And overall, the commercial makes up roughly about 20%, 25% of the overall Mohawk business with it being highest in the ceramic segment.

Speaker 9

Okay. That's helpful color. And then I guess I just wanted to touch on the India ceramic tile tariffs. Can you just talk about the price point of those Indian imports? How you're positioned versus that price point?

Speaker 9

And what percentage of your portfolio could really benefit from the tariff on the Indian tile?

Speaker 4

Well, the prices of imports have been declining with excess capacity, energy and freight costs. And of course, India has been growing. The Tile Council of North America expects those tariffs to be between 400% and 800%. And that should help our volume and increase market pricing since it's been pushed down so low.

Speaker 2

They tend to be more focused in the low to mid end of the marketplace, to answer that part of the question.

Speaker 9

Great. Thank you and good luck.

Speaker 2

Thank you.

Operator

Our next question comes from Keith Hughes from Truist. Please go ahead with your question.

Speaker 3

Thank you. Your comment around business improving earlier in the call, I know that was highlighted in the release. Have you also seen some volume improvements in Flooring North America?

Speaker 1

At this point, no. In the first quarter, volumes were still lower in both the Florida North America and Global Ceramics segments. We did see, as we noted, some volume improvement in the Rest of the World segment.

Speaker 3

Okay. So no sequential movement in those 2 is what you're saying?

Speaker 2

Remember, the Q1 is always lower than the Q4.

Speaker 3

Right.

Speaker 1

I was speaking from a year over year perspective as well.

Speaker 3

Okay. Second question in ceramic. I guess if you could talk about the end user markets in North America, I know commercial has been strong. What areas of commercial have been moving the numbers up?

Speaker 4

Well, in generally the commercial business in ceramic, I would say, has been flat. It hasn't decreased as much as we thought it would. But as Jeff said, we expect that to soften as we go through the year.

Speaker 2

I think the comment was the our business is about flat. I don't think the market is.

Speaker 7

Yes.

Speaker 3

And within commercial, I assume office is weaker, but what areas are offsetting that? Is that right?

Speaker 2

That would be the same one we talked about before.

Speaker 4

Yes, like hospitality,

Operator

the medical

Speaker 4

schools, those things have still been strong.

Speaker 1

And I would add to the government as well.

Speaker 3

Okay. Thank you.

Operator

Our next question comes from Michael Rehaut from JPMorgan. Please go ahead with your question.

Speaker 10

Hi. Excuse me. Good morning. Thanks First, I would love to get your thoughts around pricemix trends for Flooring North America and Global Ceramic. And as we look into the second quarter and even the second half of the year, given the current demand backdrop, would you expect pricing and mix to remain negative as we get into the back half?

Speaker 10

And what kind of trends would be driving that or would be driving any type of change into the positive?

Speaker 1

Given right now the low housing sales, industry volumes are still down significantly. We think price mix remains under pressure, especially given the high fixed cost of operations. The industry will start to rebound as you start to see consumer confidence in housing activity certainly increase. But we do believe we should start to get towards the bottom of the cycle, but I would anticipate price mix being that headwind for the balance of the year.

Speaker 4

I mean, one thing that should help us in the future as remodeling comes back, the margins in that at least on ceramic tend to be higher.

Speaker 10

Right. Okay. I guess the margins on commercial though are also little bit higher. So that would be depending on how much commercial slows a little bit of an offset as well or is

Speaker 2

that the right way to think about that?

Speaker 1

That is the right way to think about it. That's more specified in nature and tends to be a richer blend of product and margin.

Speaker 10

Right, right. Well, second question, would love to get your thoughts. You do a continuous amount of productivity, restructuring, adjustments to your footprint. I know there's a lot of moving pieces there, but would love to try and get a sense for what benefit cost saving benefits your restructuring actions contributed to the Q2 in aggregate. And if that type of contribution or benefit that you're seeing right now on a quarterly pace would increase into the back half of the year or just kind of stay consistent with what you're seeing this past quarter?

Speaker 1

Let me frame it a little bit better for you, Mike, in terms of the restructuring actions. We continue to execute the actions that we have previously identified. We've realized about $90,000,000 of the savings of about 100 $50,000,000 goal through the Q1. So that's last year through the Q1 of this year. So we have another $60,000,000 of benefit that is going to flow through the P and L.

Speaker 1

Most of the or much of the restructuring has been executed, executed, including closure of high cost assets, the restructuring of LVT operations, discontinuing low margin products and reducing administrative structure. And all the businesses are continuing cost reductions in SG and A, Operations and Logistics. In the Q1, that certainly was a part of the benefit of the $47,000,000 that I noted in our productivity and that will help as we go through the balance of the year.

Speaker 10

Great. Thanks so much.

Operator

Our next question comes from Mike Dahl from RBC. Please go ahead with your question.

Speaker 7

Hi, thanks for taking my questions. First one is, obviously on a year on year basis, there's a lot of noise looking at kind of the price mix comparisons on a sequential basis and maybe specifically for North America and Global Ceramic. Can you talk to kind of the sequential trends that you've seen year to date or versus 4Q in pricemix? What's embedded in the 2Q guide? And then flip side, obviously, on costs, you addressed some of the year on year dynamics.

Speaker 7

We've seen, obviously, a pickup in oil. So can you also speak to whether or not in foreign North America in particular you're starting to see some upward pressure sequentially on your cost basket?

Speaker 1

So, sequential on price mix. From Flooring North America and Global Ceramic, from Q4 to Q1, it was relatively flat. But from Q1 to Q2, I would anticipate that you'll see more pressure in Flooring North America, again, that's sequentially Q1 to Q2. Some of that is around seasonality. Some of that is in the price mix pressures in that segment.

Speaker 1

But from an overall company standpoint, I still would say that flooring rest of the world remains under probably the most pressure because of what we've talked about in the panels

Speaker 2

area. There's still opportunity there's still going to be additional productivity and cost reductions to help offset that. And as you look forward with it, we think we're coming the raw materials and input costs coming into the year were at a low. We have seen some movements in the Q1 and we expect limited increases given the present environment that we're in. We think that as business improves in the future at some point, we would expect the suppliers to raise prices and we'll have to follow with increases to pass them through.

Speaker 2

And then it's also possible given all the economic events and or regional conflicts that they could change our view on it overnight.

Speaker 7

All right. Yes. Okay, fair enough. Thanks. And then second question, Specifically with respect to the second half and 3Q, you did make a comment highlighting European seasonality 2Q versus 3Q.

Speaker 7

I feel like normally, that might be a comment that we see more next quarter as a reminder to the people as you're thinking about your 3Q guide. Can you just talk to the intent behind that? We were just trying

Speaker 2

we were trying to remind everybody that the European business is on a different cycle as well as we have some South American businesses here in the middle of their winter as that so everybody doesn't always consider the non U. S. Businesses. And we just as you're putting through the models, we just want to remind you.

Speaker 7

So in the context of the year on year improvement, is the idea that sequentially 3Q earnings could be down sequentially?

Speaker 1

So if you're looking it's a little early to tell that. A lot of it depends on the rebound and if we start to see that volume increase like we talked about earlier, but the real point was that Europe tends to peak in the second quarter from a historic standpoint.

Speaker 2

Got it. Okay. Thank you.

Operator

Our next question comes from Kathryn Thompson from Thompson Research Group. Please go ahead with your question.

Speaker 11

Hi. Thank you for taking my questions today. So you talked about the move for tariffs on services in the U. S. But we do acknowledge that and we've gotten some feedback about the Chinese tariffs that have rolled off last year and are hearing just more of dumping activities, particularly for LVT since the end of last year.

Speaker 11

What are your thoughts or updates on potential reinstatement of tariffs? Or better yet, what are you seeing in terms of trends in Europe for your products? Thank you.

Speaker 4

Well, you asked about LVT in general. So LVT sales have slowed as in other flooring categories. Pricing has declined with lower raw materials, import cost and transportation. In the U. S, our West Coast facility is increasing our production and our Georgia restructuring is being completed.

Speaker 4

And in Europe, we completed the restructuring of our LVT operations. We've implemented the change in our residential LVT to rigid and where sales are expanding and we're improving our product mix and reducing costs to increase our profitability as we go through the year. That's specific to LVT.

Speaker 2

There hasn't been any announced actions against dumping on LVT at this point. That's the answer to the other question.

Speaker 11

Are you seeing competitive pressures just from lower priced LVT hitting the market in Europe, like additional?

Speaker 4

I mean it's very competitive environment, but the products that we are putting in the market tend to be at the higher end and are actually doing pretty well.

Speaker 11

Okay. That's helpful. And then, I know that not to beat the commercial end market horse to death, But maybe pulling the string a little bit more and with the preponderance of mega projects. And one of the things, the market focused on a lackluster ABI number that came out this week. But on the other hand, our industry contacts that we talked to point out that often large kind of mega projects aren't necessarily captured in that ABI number.

Speaker 11

So channel checks are showing a better commercial end market versus what the ABI would suggest. Against the backdrop of these larger scale projects, what does Mohawk do to get in early in the conversation? I know it's always a process. You've always said that done in the past, but this is truly a different period of time. How do you position yourself with these larger type projects?

Speaker 11

And how do you kind of how do you win in this environment?

Speaker 4

Well, I can just answer one thing on that that in our carpet commercial and our ceramic commercial, we've got a lot of people that are calling on these commercial projects together and are sharing resources and it works out really well and gives us an advantage.

Speaker 2

We're calling on the designers, the building owners and the contractors all at the same time. We are participating in the planning of the different projects and we've been able to position ourselves well in the marketplace. And our comments, I guess, are agreeing with you that it's holding up a little stronger than we anticipated, but we still think it's going to continue to slow and we're being aggressive in our calling on and offerings to the marketplace.

Speaker 11

Okay, great. Thank you.

Speaker 4

Thank you.

Operator

Our next question comes from Laura Champine from Loop Capital. Please go ahead with your question.

Speaker 12

Hi. My question is on excess capacity. I think that you've quantified sort of ballpark running at 75% utilization in the not too recent past. Where is that now and where can how high can you how high would you like to get it with your current restructuring initiatives, assuming volumes stay where they are today?

Speaker 2

The restructuring initiatives we've done, we're still in a 75%, 80% range. It should it also depends which period and quarter you're in. So as you go through the year though, I think it's going to it should move up. And the question really is when does the market get back and really change the dynamics. We tend to try to flatten our production out over the year to even it out to level it out as best we can.

Speaker 2

We haven't done anything that's going to dramatically change it, the capacity utilization without the marketplace improvement.

Speaker 1

As we said on CapEx, really our focus is more on the cost reduction and product innovation, as we just complete the growth investments that we had talked about before.

Speaker 12

I know that it flexes back and forth, but do you find yourself becoming more or less vertically integrated, meaning are you extruding your own yarn? Are you doing less so with this cost inflation that you're seeing?

Speaker 2

It hasn't changed.

Speaker 12

Okay. Thank you.

Speaker 2

Thank you.

Operator

Our next question comes from Stephen Kim from Evercore. Please go ahead with your question.

Speaker 13

Yes, thanks very much guys. Earlier in the call, I think you talked about the fact you're obviously targeting to get to a 10 percent operating margin and then look to take it further. But that 10% number just kind of was just wanted to explore that a little bit. I'm curious what kind of volume growth do you think is needed to reach that target on an annualized basis relative to kind of like where we are from where we are here? Is it we're talking about giving like maybe 10% kind of volume growth from here?

Speaker 13

Or just kind of get some order of magnitude in your estimation?

Speaker 2

I'm not sure I have the number to give you. We have our models out for the next 3 years, and we see ourselves reaching that with the different models we've done. And I don't recall the volume changes that are built into it. The timing, like you know, it's impossible to define the moment in time it changes. We think we're going to see some of it this fall and we should see significantly more next year as we come out of this.

Speaker 4

And Stephen, given how underutilized we are, as that volume moves up, we get a substantial benefit as it moves.

Speaker 13

Yes. I mean, clearly, I mean, that's the one thing obviously that's outside of your control. I mean, it sounds like you're doing everything you can certainly on the cost side and even on the product side. But at the end of the day, that's the part that the market's going to determine for you. And so but it sounds like you're looking for something fairly material.

Speaker 13

I mean, it's not like I mean, I threw a 10% type growth number out there that I didn't think that that was unreasonable. Is that kind of in the ballpark of the expansion off the bottom that you would see at a minimum?

Speaker 1

Yes. Stephen, the numbers that you're talking about are not unusual. As you come out of a downturn, even if you go back to the last one, that 1st year you get an accelerated pop in the sales as remodeling starts to come back, new home construction is stronger. So it's not unusual to get a multiyear benefit from the rebound before you get more back into a normal growth, which in flooring could be GDP plus type numbers.

Speaker 13

Yes, yes, exactly. Okay. Well, that will be fun to watch. Second question relates to Flooring Rest of World specifically. I'm looking at the margins there.

Speaker 13

And in each of the past 3 years, your margins have declined, from the Q1, which was the highest, actually to the second, to the third, to the 4th. It was actually a it's kind of a steady decline. And then going even further back, typically the margins are stronger certainly in the front half than they are in the back half. Just wondering, are there any structural factors that you can call out, maybe the vacations as part of that? But and is there any reason to think that 2024 would track differently from that recent trend where we've seen just sequential declines in margins?

Speaker 2

Listen, in Europe, you're correct. When you come out of the you tend to ship a little more going into the Q3 because of the vacations both of us and our customers. The vacations last 2, 3 weeks, which in many cases we shut down the entire factories. Then you hit the 2nd quarter to be a peak.

Speaker 7

Got you.

Speaker 13

All right. Thanks very much guys. Appreciate it.

Operator

Our next question comes from Sam Reid from Wells Fargo. Please go ahead your question.

Speaker 7

Awesome. Thanks so much guys. I wanted to dig a bit deeper on pricing, particularly in the U. S, but perhaps ask it from a slightly different vantage point. So can you walk through some of the differences that you might be seeing by channel?

Speaker 7

So for instance, are there any deviations in price dynamics that you've been seeing more recently, say, between the independent retailers versus the home centers?

Speaker 2

In general, the retail business is under a lot of pressure. You have the home centers that in general have a lower income level buying on average from our specialty retailers. So they've been impacted more than the other channel at this point.

Speaker 4

And I would say overall like particularly in ceramic, the one that's been off the most has been the remodeling, which not only affects the home centers like Jeff said, but it's also one of our higher margin businesses that's been under pressure.

Speaker 7

That makes sense. And then maybe switching gears, just quickly talking tile here. Your Daltal business had a pretty impressive display at the Kitchen and Bath show this year, at least I was impressed by it. And that was in Vegas, obviously. I wanted to see though any wins that you've gotten from that event or kind of any feedback?

Speaker 7

Just sort of curious kind of what the outcome was there? Thanks.

Speaker 4

I think we had a really good show. And if you just talk about U. S. Ceramic, the new construction and commercial improved as we expanded our distribution. Our price and mix have been negatively impacted, but we've done a lot on new innovative and higher margin products that are gaining traction and partially offsetting these price declines.

Speaker 4

So there's been a lot of work in our ceramic business in the U. S. Particularly to improve our product mix and I think it's paid off.

Speaker 2

And we've taken some market share from the high end Europeans with their costs higher and we've also been able to expand in some of the builder channels as our service levels were better than the imported products coming in.

Speaker 7

Absolutely, guys. Helpful and thanks so much.

Operator

Our next question comes from Eric Broussard from Cleveland Research. Please go ahead with your question.

Speaker 7

Yes. Two things if I could. First of all, what was better than expected in the quarter? I think the earnings were a little bit better and even the 2 shoe guys a little bit better than consensus. I know that's not your number, but what's better than expected?

Speaker 2

So the Q1 results were better because we had greater benefit from restructuring of productivity. We had declines in input costs that he went through with you a minute ago offset the lower pricing and mix. The weaker sales did result in more unabsorbed overhead, which we had expected. Flooring North America improved the most, but it had the most easier comps from the group. And then the Rest of World piece, we keep reviewing that the panel business really did the margin step change from last year in it as the industry volume declined.

Speaker 2

And anything else you want to add, Jim?

Speaker 1

No. The commercial channel, again, keeps out performing residential at this point. But as Jeff said, probably the biggest gains for the quarter were around the productivity that the segments threw off.

Speaker 6

Okay.

Speaker 7

And then secondly, the optimism going into the second half, what are you seeing in the business now? You talked about North America price mix, I guess, eroding a bit incrementally into 2Q. What are you seeing within your business now, the results March or even April, that is improving and kind of informs that second half optimism?

Speaker 2

We're seeing the normal seasonality improvements through the Q1 and going into the second that we would expect. And we don't have any definitive information that you don't have.

Speaker 1

Yes. And we'll continue to watch certain signs. We look at indicators like consumer confidence. Obviously, we've talked about interest rates, but also discretionary spending and continued monitoring the housing starts as well as new build has been stronger through this cycle along with commercial.

Speaker 2

Most people are anticipating the remodeling business coming off the bottom. It's been so low with people postponing it. And we're assuming we're going

Speaker 1

to see some benefits from that also. Yes. So we anticipate volumes really across the business to start to pick up at least in the low single digit area.

Speaker 2

One other thing. Last year, we reduced inventory substantially. We don't have to do that again. Thank you.

Operator

And ladies and gentlemen, with that, we'll be concluding today's question and answer session. I'd like to turn the floor back over to Jeff Lorberbaum for any closing remarks.

Speaker 2

Long term, the category will rebound from the downturn as it always has. We're well positioned on our product and markets to enhance our results. We appreciate you for taking the time and joining us. Have a good day.

Speaker 4

Thank you.

Operator

And ladies and gentlemen, the conference has now concluded. We do thank you for attending today's presentation. You may now disconnect your lines.

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Earnings Conference Call
Mohawk Industries Q1 2024
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