Mohawk Industries Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
July 26, 2024

There are 13 speakers on the call.

Operator

Good morning, everyone, and welcome to the Mohawk Second Quarter 2024 Earnings Conference Call. All participants will be in a listen only mode. After today's presentation, there will be an opportunity to ask questions.

Speaker 1

Please also note today's event is being recorded. At this time,

Operator

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 call. Joining me on today's call are Jeff Lorbon, Chairman and Chief Executive Officer and Chris Welborn, President and Chief Operating Officer. Today, we'll update you on the company's Q2 performance and provide guidance for the Q3 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. With that, I'll turn the call over to Jeff. Thanks, Jim.

Speaker 2

Performance reflected our focus on the controllable factors of our business, including sales initiatives, cost containment and restructuring actions. Our net sales for the quarter were $2,800,000,000 down 5.1 percent compared to last year. Per share were $3 up 9% year over year as a result of productivity initiatives and restructuring as well as lower energy and material costs, partially offset by market pressures on pricing and mix and foreign exchange headwinds. We generated free cash flow of approximately $142,000,000 during the quarter for a total of $239,000,000 year to date. In the quarter, we purchased 755,000 shares or 1.2 percent of our stock for approximately $90,000,000 remain optimistic about the future of our business and confident that in time our worldwide markets will recover.

Speaker 2

Our 2nd quarter results exceeded our expectations despite soft market conditions around the globe. The commercial channel continues to outperform residential, although some softness in the category is occurring. While the long term demand for our products is strong, residential purchases across our geographies remains weak. During the quarter, the actions we've taken to improve volumes in many product categories helped us, though the gains were offset by consumers trading down and competitive pricing. Residential Remodeling is under the greatest pressure as consumers defer large discretionary purchases due to inflation and uncertainties about the future.

Speaker 2

In addition, flooring remodeling is significantly influenced by housing turnover rates, which remain suppressed due to elevated mortgage rates, high home prices and the locked in effect on homeowners. To reduce costs and align our business with current conditions, we're initiating additional restructuring actions across all our segments that would generate annualized savings of approximately $100,000,000 of which $20,000,000 to $25,000,000 will be recognized this year. The cash cost of these actions is about $40,000,000 with a total cost of approximately $130,000,000 The execution time lines will vary by project with some extending throughout 2025 and into 2026. In our Global Ceramics segment, we will optimize manufacturing by idling some less productive operations and aligning production to increase efficiency. We'll consolidate regional warehouses, further reduce product complexity and leverage technology to lower administrative costs.

Speaker 2

We'll rationalize some of our Flooring North America manufacturing to enhance plant utilization, retire less efficient equipment and simplify our offering. Enflowing Rest of World will lower our administrative and operating costs, streamline our product portfolio and distribution and decommission inefficient assets. These actions will complement our previous restructuring initiatives that will reduce costs by approximately $60,000,000 in 2024. Along with these, our teams are implementing many measures to manage current conditions, including enhancing sales opportunities, increasing productivity and managing our overhead and working capital. Economists had anticipated that the Federal Reserve would lower rates this year to stimulate the U.

Speaker 2

S. Housing sector. While central banks in some of our markets have already begun to reduce rates, the Fed has indicated it intends to wait until inflation and economic activity sufficiently slow before taking actions. After the U. S.

Speaker 2

Consumer Price Index dropped in June, many are predicting a September rate cut. If the Fed begins to lower rates at that time, we anticipate our industry should benefit next year as pent up consumer demand increases flooring purchases. In April, U. S. Today once again named Mohawk one of America's climate leaders given our reduction in greenhouse gas emissions over the past 4 years.

Speaker 2

On July 16, we published our 15th annual Sustainability Report, which can be found online at mohawksustainability.com. Now Jim will review our financial performance for the Q2.

Speaker 1

Thank you, Jeff. Sales for the quarter were just over $2,800,000,000 that's a 5.1% decline as reported or 4.5% on an adjusted basis with Global Ceramic having the strongest quarter versus the prior year. All segments continue to see price and mix pressures with residential remodeling trailing the new construction and commercial channels in the quarter. Gross margin for the quarter was 25.8 percent as reported and 27.1% on an adjusted basis versus 25.9% in the prior year, with lower input costs and increased productivity offsetting the weakness in price and mix. SG and A expense was 18.2% as reported and 17.9% on an adjusted basis.

Speaker 1

This is in line with the prior year. Operating income as reported was $214,000,000 or 7.6%. Non recurring charges for the quarter were $43,000,000 primarily due to restructuring expenses in the period. That gives us an operating income on an adjusted basis of $257,000,000 or 9.2 percent. That's a 90 basis points improvement versus the prior year as our lower input costs of $83,000,000 and productivity gains of $49,000,000 offset the unfavorable price mix of $111,000,000 and FX of $11,000,000 Interest expense for the quarter was $13,000,000 that's down $10,000,000 from the prior year due to strong overall cash flow and the payoff of return loans earlier in the year.

Speaker 1

Our non GAAP tax rate was 20 point 9% versus 19.6% in the prior year. We expect Q3's rate to be between 19% 20% and the full year rate to be between 20% 21%. That gives us an earnings per share on a reported basis of $2.46 or on an adjusted basis of $3 That's an increase of approximately 9% versus prior year. Turning to the segments. Global Ceramic had sales of just over $1,100,000,000 that's a 3.4% decrease as reported and 2.9% on an adjusted basis.

Speaker 1

Our industry volume remains constrained and pricing aggressive, while we are investing in new products to try to improve our mix. Across our various geographies, residential new construction is outperforming remodeling and commercial, though slowing, is stronger than residential. Operating income on an adjusted basis was $95,000,000 or 8.5 percent, which was in line with the prior year as lower input costs of $17,500,000 an increase in productivity of $14,000,000 offset the unfavorable price and mix of $25,000,000 dollars FX of $10,000,000 and the lower overall volume. In Flooring North America, sales were $959,000,000 or a 4.3% decrease as reported, even though our laminate product continues to take share as a waterproof wood alternative and with our LVT product is expanding in the retail and builder channels. In commercial, the hospitality, government and education channels are driving the outperformance versus the residential sector.

Speaker 1

Operating income on adjusted basis was $82,000,000 or 8.6 percent. That's an increase of 2 60 basis points versus the prior year as lower input costs of $36,000,000 and the strength of our productivity of $19,000,000 offset the weakness in price and mix of $36,000,000 And in flowing Rest of the World, net sales were $727,000,000 That is an 8.3% decrease as reported and 7% decrease on an adjusted basis, as market conditions remain slow with weak consumer discretionary spending on larger ticket home projects. Pricing and mix is also continuing under pressure, though sales actions taken by our team through the introduction of new products and expansion of our customer base did lead to an increase in unit volume in laminate, LVT and panels. Operating income on adjusted basis was $91,000,000 at the 12.6 percent operating margin, that's 40 basis points increase versus prior year, led by a reduction in input costs of $30,000,000 positive impact of increased productivity of $15,000,000 offset by unfavorable price and mix of $50,000,000 Corporate eliminations were $12,000,000 during the quarter, in line with the prior year, with 20.24 expected to

Speaker 3

20

Speaker 1

with free cash flow during the period of $142,000,000 bringing our year to date total of almost $240,000,000 Inventories were just shy of $2,600,000,000 That's a year over year decrease of approximately $40,000,000 due to reductions in cost and impact of FX as volumes slightly increased. Inventory days increased to 128 versus 120 in the prior year. The current plan though is to keep inventory relatively flat versus the prior year by year end. Property, plant and equipment stands at just under $4,800,000,000 with CapEx of $91,000,000 in the quarter compared to D and A of $172,000,000 The company plans to invest approximately $480,000,000 in the year with D and A at approximately $630,000,000 And the balance sheet overall and cash flow remained very strong with net debt of $1,900,000,000 leverage at 1.3x and liquidity at approximately 1 point with the company purchasing approximately 90,000,000 of shares in the quarter. With that, I will turn it over to Chris to review our Q2 operational performance.

Speaker 3

Thank you, Jen. In Global Ceramic, our markets remain highly competitive as reduced industry utilization continues to impact pricing and margins. Our mix is weaker given soft residential remodeling activity and consumers trading down to lower price points. In the quarter, the impact of labor and freight inflation was offset decreases in material and energy costs. In addition to our restructuring initiatives, we are implementing numerous cost reduction projects across the segment including product reengineering, process improvements and streamlining administrative functions.

Speaker 3

To improve our mix, we are investing in product differentiation with leading edge printing, polishing and rectifying technologies. These assets allow us to create floor and wall tile collections with superior visuals and higher value sizes, styles and formats. On May 10, the U. S. Department of Commerce announced the commencement of antidumping and countervailing duty investigations of ceramic tile imported from India.

Speaker 3

The U. S. Tile trade organization believes this could lead to tariffs between 400% and 800%. Given India's widespread dumping, Mexico has increased import duties and other markets are currently investigating similar options. In the U.

Speaker 3

S, our high end design capabilities, domestic manufacturing and extensive distribution infrastructure are enhancing our participation in the builder and commercial sectors. In Europe, our unit sales exceeded last year as we leveraged our styling advantages to create higher value products. Our porcelain slab expansion has enhanced our offering as demand continues to increase across the flooring, furniture and countertop markets. European energy prices declined from last year, which should help increase consumer discretionary spending. Markets in Latin America remain difficult despite central banks initiating interest rate cuts.

Speaker 3

In Mexico, we have announced price increases to offset inflationary pressures and import duties. In Mexico and Brazil, we are initiating additional sales and operational improvements maximize the performance of our acquisitions. In both countries, we have restructured the organizations and implemented new product and distribution strategies. In our Flooring Rest of World segment, market conditions remained slow with constrained consumer discretionary spending. Declining inflation led the European Central Bank to lower key rates on June 6 and additional cuts may follow.

Speaker 3

In this challenging environment, we focused on actions to drive sales such as enhancing our product offering, executing promotions and implementing strategic marketing campaigns. As a result of these sales initiatives, our volumes in laminate, LVT and panels improved from prior year low levels. Pricing and mix remained under pressure, partially offset by lower input costs. In addition to our restructuring actions, we are launching many consolidating regional flooring distribution centers and reducing logistics costs to align with present conditions. We are completing the conversion of our residential LVT program from flexible to rigid products and we are improving our mix in our sheet vinyl category.

Speaker 3

Our laminate volumes grew as we expanded Insulation and Panels businesses have declined as fewer projects are being initiated and industry competition escalates. In Australia and New Zealand, our results were stronger given our actions to improve price and mix through new products and retail promotions. Increased manufacturing volume and associated productivity gains to margin improvement in our business. In Flooring North America segment, despite challenging market conditions, volumes improved year over year in some markets and channels, though partially offset by price and mix dynamics. Our margins benefited from productivity gains driven by operational improvements, lower input cost, logistics efficiencies and restructuring.

Speaker 3

This year, we have expanded our relationships with larger U. S. Homebuilders who are increasing their share of the market. Residential remains weak with home sales turnover at the lowest level since 2008 and consumers continuing to delay remodeling projects. Both of our luxury carpet collections and our value oriented polyester products are accelerating.

Speaker 3

Sales of our LVT and laminate collections were stronger in the retailer channels. Our recent laminate expansion is ramping up to satisfy higher demand for our waterproof flooring. The commercial sector continues to outperform residential with hospitality, government and education channels leading, though fewer projects are being initiated. Jeff, I'll return the call to you for closing remarks.

Speaker 2

Thank you. We anticipate present conditions continuing in the Q3 with elevated interest rates, inflation and weak housing sales impacting our markets. In the current environment, we're executing plans to optimize our revenues and costs. We're managing the controllable aspects of our business, including innovative product introductions, reducing overhead and rationalizing less efficient assets. We're streamlining operations by reducing when our markets recover.

Speaker 2

We continue to benefit from lower energy and raw material costs, partially offset by labor and freight inflation. In the Q3, we anticipate pricing pressures will continue given low industry volumes, constrained consumer spending on large purchases and consumers trading down. As usual, European summer holidays will seasonally impact our sales and performance. Given these factors, we anticipate our Q3 adjusted EPS to be between $2.80 $2.90 excluding restructuring or other one time charges. While we manage the short term environment, we're preparing to capitalize on the demand that occurs when the industry rebounds.

Speaker 2

Residential remodeling is our industry's largest category and should lead the recovery as interest rates decline and consumer confidence improves. Across our regions, new home construction is needed to satisfy demand and aging homes will require remodeling to meet homeowners' needs. In addition, new commercial projects will be initiated as the economy strengthens and our product investments will enhance our participation. As the world's largest flooring manufacturer with the products, capabilities and financial strength to optimize our results as the market recovers. We'll now be glad to take your questions.

Operator

Ladies and gentlemen, at this time, we'll begin that question and answer session. And our first question today comes from Eric Bosshard from Cleveland Research. Please go ahead with your question.

Speaker 4

Good morning. Thanks. The restructuring or cost out program, whichever you call it, I'm just curious, you've gone through a couple of these the last few years. The projects that you've identified here, why were they not included in the last one or asked a different way, like why take cost and capacity out now?

Speaker 2

Well, when we're looking at the market to where it is now, we think there'll still be some time before we see a significant recovery into next year. And so we're trying to work through how we're going to optimize the profits both in a short term and a long term. And we believe that taking more costs out will position us better in the second half and it will also increase our profitability as the market

Speaker 4

recovers. Within this, I guess the second component of this, as you think about solving for the growth scenarios in 2025, how much capacity do you have to support growth next year or embedded in that what is the growth assumption you're considering as you right size capacity or optimize capacity?

Speaker 2

As we think about next year, we think that we're going to start seeing the cycle move from where the low point is at. Demand for housing today remains strong and we think there's pent up demand in the remodeling markets, but we can't predict the timing of it, The decline of inflation, the change in interest rates will positively impact consumer confidence, housing sales, home remodeling, commercial activity, which all should have a significant impact on our category. As it improves, we think we'll get the leverage in these cost structures and our product mix. On an individual business, we have the we put investments in, in the areas where we thought we would have the most growth rate in the pieces and those the businesses that we're putting new stuff in is the laminate business, the countertop business with quartz, the slab business in Europe and the insulation businesses. We believe those have the most opportunities for higher growth and we have invested in those.

Speaker 2

So we're ready to take advantage of the next few years as they improve.

Speaker 4

Thank you.

Operator

Our next question comes from David MacGregor from Longbow Research. Please go ahead with your question.

Speaker 5

Yes. Good morning. Thanks for taking the questions. I guess just thinking while we're on the topic of restructuring and the cost reductions, can you just talk about how the anticipated savings, which I think you shared some aggregate numbers on that, how that would fall across the 3 reporting segments?

Speaker 1

As you look at the restructuring savings, first of all, the initial actions that we took last year, we've realized about of the $150,000,000 that we announced, about $110,000,000 through the Q2 and should see approximately about $130,000,000 by year end. That program was fairly evenly spread across all three of the segments, maybe with Flooring North America a little bit more. With the announcement today of the additional $100,000,000 as we said, dollars 20 to $25 would be recognized this year, a much larger piece into the following year. And then all businesses are continuing to look at reductions in SG and A, operations and logistics. And as you look at that, Flooring North America will have more benefit than the other segments in the recently announced actions.

Speaker 5

Okay. Thank you for that color. And just as a follow-up, I wanted to get you to talk a little more about the commercial business where you're seeing a little more strength than you are in residential. And you noted some softness though is now starting to creep into this business through fewer projects being initiated. Can you just talk about what you're seeing there?

Speaker 5

And is there a difference between the Main Street commercial versus institutional business?

Speaker 2

And what level of growth

Speaker 5

should we anticipate through the second half from commercial?

Speaker 2

You're correct. Commercial is holding up better the ones that are outperforming for us are hospitality, retail, government and education. We're also taking actions to increase our penetration with large strategic accounts and we're increasing our participation with them. The good news is that in these categories, pricing is more resilient given more differentiation in the marketplace. And then just keep in mind, as we come out of this thing, commercial improvement takes longer because even though the macro things change, the planning and construction

Speaker 5

you talk about what the growth is for the second half? What do you think you might see there?

Speaker 2

We're projecting it's going to be down somewhat. It's different by market, by channel all over the place. But I mean, it is slowing somewhat.

Speaker 4

Okay. Thanks, Jeff.

Operator

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

Speaker 6

Thank you. Good morning, everyone.

Operator

Good morning. Good morning.

Speaker 6

Jeff, my first question is a bit about how you're driving the business through One of the things that you've mentioned is the product differentiation that you're focused on as well as the cost side of things. Can you talk a bit about what some of those benefits or those features are that you're stressing in those products? And as those gain traction over the coming quarters, how should we think about what they can contribute in either the back half of this year or even into next year in terms of perhaps mix shift and what that could mean for the business on a top line as well as a profitability perspective?

Speaker 2

Sure. The new products is in the new products, one is we've continued to invest in putting them out in the marketplace and bringing new products. And every category is participating. In ceramic, we put in new assets that can make tiles with different color intensity, textures, three-dimensional surfaces, different shapes and sizes. In LVT, we've taken actions that we can actually enhance the coloration and textures.

Speaker 2

And we've also introduced a different core, we call a renewable polymer core as another category. In laminate, which we've introduced features that will impact both the durability and the sound acoustics with it as we go through. And even in the different countertop businesses, in our quartz countertop, we're introducing higher value veining technologies in the mid price points and every product category has features like this that we're doing as we come out. What's happened is the biggest part of the market that's been affected, the bottom end is doing better and the high end, the middle part which goes through retail is the most affected and these features and benefits will have a lot of positive impact when the retail business picks up as consumers come back in the marketplace and get more confident.

Speaker 6

Okay. That's helpful. And then, it was encouraging to see that you did $90,000,000 of share buybacks in the quarter. Can you talk a bit about what drove your decision to do that? And should we take it as a sign perhaps of you having some greater confidence in the visibility and the forward trajectory of the business?

Speaker 6

Is it a sign that maybe we've turned the corner and you're feeling better about things from here?

Speaker 2

I think you probably answered my question for me. We're more confident that we are reaching the end of the cycle. We have taken additional actions to manage the short term pressures by taking additional costs out. We're confident that the markets are going to recover. We can't predict the moment, but we know they're going to recover.

Speaker 2

So it's a good time to buy shares.

Speaker 6

And does that mean maybe that you'll do more of them in the future?

Speaker 2

Well, our balance sheet as you know is strong. In past cycles, we've had multiple opportunities coming out of these things as the industry recovers with acquisitions. And we'll continue to evaluate share repurchases as a part of our capital allocation strategy.

Speaker 6

Okay. Thank you. Good luck with everything.

Speaker 1

Thank you.

Operator

Our next question comes from Mike Coff from RBC Capital Markets.

Speaker 4

Just I think the prior question around second half growth, it sounded like that was specific to commercial. Maybe could we zoom out and just you've been organically down mid single digits from top line standpoint in the first half. Can you talk about what's embedded from a top line standpoint for 3Q and how you're thinking about that into 4Q as well?

Speaker 2

Sure. At this point, we don't anticipate thing changing the present conditions in the Q3. And we've built in just a continuation of weak demand and pressure on pricing and all and continued low industry utilization. We don't see the mix changing with the consumer in the period much from where it is. And so that we see the trading down continuing.

Speaker 2

We see new construction maybe softening a little bit, but not a lot. And then we still have remodeling that's compressed. And just to remind everybody, the remodeling business is our highest margin business because they tend to buy better quality products than the other residential channels. In addition, to remind everybody, the Q3 is always seasonally slower and don't forget European holidays. They take off and it pulls down our Q3.

Speaker 2

And then in general, we're anticipating compared to last year, we're going to see some improvements from all the different actions we've been taking. If you go into the Q4, we think that central banks will probably start reducing rates, but we expect that the impact on us, we probably won't feel until we go into the next year. And then again, the seasonality of it declines with the holidays where people spend on other things than home and commercial projects. And then with this, given where we are built into ours is continued low volume of our industry, which means we're going to have shutdowns and unabsorbed overheads as we maintain the discipline in our inventory levels as we go through. Other than that, I guess, as we get out in that area for there and further out, we could start seeing cost increases in different pieces.

Speaker 2

And as those things happen, we'll have to consider, do we need to make any changes and raise prices in the future as the markets change. What else is there? In the Q4, one other comment, we actually have 2 additional days in the period due to just way the calendar falls.

Speaker 4

Got it. Okay. That's really comprehensive. Thank you for that. As a follow-up question, so top line in the near term sounds like status quo.

Speaker 4

I guess your guide then implies that I think the operating margin sequentially is still kind of flattish, which to your point you have some normal seasonality, but there's obviously puts and takes around that seasonality, but then some of the actions that you're taking. So can you speak to, I guess, the ability to continue to improve margins from here in the back half of the year despite these top line pressures?

Speaker 2

Let me we gave you the expectations for the Q3 is that most of the improvements coming from marketplace. However, we are seeing some improvements in volume as we said in I don't know it could be almost maybe half the product categories or different places. But at the same time there's still huge pressure on pricing and mix. So anything that we're picking up in the volume piece is being offset by the pricing and mix in the marketplace in the second half.

Speaker 4

Got it. Okay. Thanks, Jeff.

Operator

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

Speaker 4

Thank you. In the release in Flooring North America and in the prepared comments you called out LVT and laminate. I guess the question were those businesses up year over year?

Speaker 2

LVT and laminate, the volumes have improved. We've improved some of the margins in those businesses we go through. You have to remember last year there was all kinds of also negative pressures in the comparisons. So laminate is gaining share and we're doing our self help actions in LVT is helping those.

Speaker 1

Yes. Those were 2 of the categories, Keith, that Jeff was mentioning that from a unit volume was up.

Speaker 4

Units were up in both. Okay, great. And your earlier comment to the last question that I think you said half your product categories are up in volume. It's a remarkable statement if I heard it correctly. That feels like share gain.

Speaker 4

I don't think your markets are that strong. Is that fair to say?

Speaker 2

Remember, I'm talking about a worldwide market with a lot of different parts

Speaker 5

in it.

Speaker 2

Yes, right.

Speaker 7

I get

Speaker 2

it. With different comparisons. In Europe, I mean, the market is really depressed. So and in Europe a year ago we were struggling with some cost structures with high gas prices and pieces. It was more difficult to compete against the imports.

Speaker 2

So I mean we've taken actions in different marketplaces to help us. I think that we're increasing our distribution in stone. And I mean it's a tough market, but I think we're executing well.

Speaker 8

Okay, great. Thank you.

Operator

Our next question comes from Michael Rayhut from JPMorgan. Please go ahead with your question. All right, thanks. Good morning, everyone.

Speaker 9

Question, I'd love to try and get a sense from your perspective of what drove the upside to the second quarter, if there were specific areas within perhaps, for example, North America that maybe came in a little better than expected either and just more broadly on either the sales or the margin side. And if you see any of these trends perhaps continuing into the Q3 that might cause a similar result, if those trends kind of remain in place that that might ostensibly also drive some upside to the 3Q guide?

Speaker 2

The 3Q guide has, as I just said, it's got the assumption that the present conditions in the second

Speaker 5

quarter continue into the Q3.

Speaker 2

It had don't forget Europe. I mean, you have to know that when they go on vacation, people quit spending money. And whatever is happening, it takes a huge dip and the holidays are different in every country. So it pulls down our period. The pressures on pricing and mix, I can't emphasize enough.

Speaker 2

I mean the markets when you have industries with huge capital investments running at low throughputs, everybody is trying to optimize the marketplaces. And our aggressiveness in trying to bring new markets, satisfy people different, expand our distribution are helping us, but it's difficult.

Speaker 1

Yes. Then on your question, Mike, on specifically like Flooring North America, I mean, generally across all three segments, in Jeff's prepared remarks, talking about managing the controllable costs and the business is really benefiting from those cost reduction and restructuring activities, while we're still investing in new products, which should improve our mix and profitability as some of this pent up demand released later in the recovery.

Speaker 9

Okay. No, I appreciate that. Secondly, just wanted to get your sense in terms of how to think about the top line in the back half of the year. Currently, we're looking for a slight decline on a consolidated sales basis for both 3Q and 4Q. I was wondering if that is similar to how you're thinking about the business, particularly in the Q4 where there is an easier comp?

Speaker 9

And then just technically, if I could just throw in an additional technical question. The share count really didn't move that much. The average share count didn't really move that much in 2Q. You had the share buyback though. Should we expect to see that fully reflected in the share count in 3Q?

Speaker 9

Or is there any offset share issuance that might still keep the share count around 64,000,000?

Speaker 1

Well, the last question, it is a weighted average, and so it depends on when, obviously, each of the shares was purchased. So you'll start to see more of the impact as you go into Q3 and then for the full year. So there will be some change as you go out the balance of the year. In terms of the top line for the back half, as we've said, we are seeing some unit expansion in some of our product categories. But remember, as Jeff just emphasized, you also have price and mix.

Speaker 1

So even if you're up a little bit on units, it's being basically either offset or partially offset at the very least by price and mix.

Speaker 9

Okay. Thank you.

Operator

Our next question comes from Phil Ngai from Jefferies. Please go ahead with your question.

Speaker 7

Hey guys, congrats on a really strong quarter and in a tough environment. So just if I heard you correctly, you're kind of hinting at maybe you're seeing higher costs, you could consider raising prices, certainly ocean freight shipping containers, depending where it's coming from, I think like Asia might be up like 3x to 4x, at least that's what we're hearing. It's putting a lot of pressure for some of your competitors that import products into U. S. Like LVT and lamin of that sort.

Speaker 7

At least we're hearing maybe there's rumblings of price increases in the back half. I'm curious what you're hearing on that front And what does that mean for Mohawk? Is that a cost headwind? Does that provide a pricing umbrella? And how does that potentially impact your portfolio?

Speaker 3

Well, I'll just comment that the increased ocean freight and potential tariffs should improve our or should benefit our manufacturing domestic manufacturing.

Speaker 2

And then the other side, the imported products where we'd have them, we'll have to pass through the ocean freight changes as everyone else will as it changes.

Speaker 1

I guess the I think you

Speaker 2

had another on the material side of it, we think that the prices have bottomed and we are seeing some increases now. In this marketplace, it's really hard to determine where they're going to be 6 months from now. So given the low demand, we see it coming. We'll just have to we'll have to find out if it's going to happen sooner or later. Usually, when you have low demand like we have, there's not much pricing upward movement materials, but we'll have to react to whatever happened, and manage through it as we go through.

Speaker 7

So, Jeff, you're not hearing any rumblings, importers are looking to raise prices at this point?

Speaker 2

I don't hear anything, but they're going to have to. It's not if. I mean these freight rates are up significantly.

Speaker 7

And then maybe this is a tough question to ask because you mentioned a few times that it's hard to predict timing. But let's say if we do get rate cuts this fall, whether it's the U. S. And Europe, how does that kind of ripple through? Could you see the uplift as soon as spring next year?

Speaker 7

Like I want to get a sense of what the lag works and how different parts of your end markets should kind of shake out. Do we need to actually see existing home sales turn or rate cuts coming down provides that confidence and maybe unlocks HELOC. Just kind of help us unpack what it means from a rate cut standpoint and how that, the lag and how it impacts different parts of your portfolio?

Speaker 2

If it works the same as historical, which it may or may not, when rates start coming down, the market the people's confidence goes up. And what happens is you have this multiple years of pushed out remodeling that happened. So usually, the consumer that's sitting there when they start feeling better about the economy and different pieces, the remodeling industry picks up and there's very limited lag times when it starts. That's typically followed by the new housing and existing houses. People start moving more and more confidence in doing it.

Speaker 2

And then you typically have anywhere from a 9 to 12 month lag from that point before the commercial sector, which takes longer to plan, get budgets approved before you start seeing those type of things help tends to be the typical recovery. And when you start with the timing of it, I mean, your guess is as good as mine. Sooner is better for me. Okay. But you would expect your R and

Speaker 7

R side to come back first. Is that fair, in particular North America?

Speaker 2

It always does it.

Speaker 7

All right. That's helpful color. Really appreciate it.

Operator

Our next question comes from Matthew Bouley from Barclays. Back

Speaker 10

on the new restructuring, I'm curious if it was more kind of a change to your near or medium term outlook for that recovery? Or was part of this something more structural around kind of the longer term need for capacity in certain product categories. I think you mentioned it might be a little more weighted to the flooring North America. So yes, any color on that kind of decision process? Thank you.

Speaker 2

We have to manage the circumstances we're in. We know that market is going to turn in the future. We don't know the timing it's going to turn. We know that our view was that the second half of the year will continue to be difficult. So we encouraged all of our businesses to find ways to improve their margins, to get through the near term without hurting our long term potential in the future.

Speaker 2

And all of them put together projects to improve their productivity to utilize the assets. In some cases, we've idled some assets that we can start back up and in other cases, we've shut down some higher cost wins. We've taken costs out with people. We are managing the product portfolios aggressively to have them in the best shape we can have in. And we think we're doing all the right things to take advantage of when this thing turns.

Speaker 2

And don't forget, when it turns, it's going to take several years typically, the industry runs at slightly over GDP. And when this thing turns, you typically have multiple years of above industry growth to get us back to the trend lines.

Speaker 1

But given the restructuring we take, it's important to reiterate that we feel good about the capacity that we still have installed to react to, as Jeff said, that recovery period.

Speaker 7

Got it. Okay. That's helpful.

Speaker 10

And then secondly, kind of zooming into the near term, I think the difference between price and cost got a little wider in Q2 than in Q1. I think as we look forward, clearly the year over year comparisons are very different on price and cost as we get into Q3. I mean, is the expectation that you would still stay a little bit negative on price cost or any additional color on how that would play out over these next few months? Thank you.

Speaker 1

You are correct that in the quarter, if you just look at material and energy, that's about $90,000,000 of benefit from a year over year perspective compared to the weaker price mix of $111,000 That's just material and energy. And then the productivity, which was close to $50,000,000 was really there to offset the increases in wages and benefits. Now as you fast forward to the second half of the year, we would expect each of the segments to see that continued price and mix pressure. But from a year over year benefit also, there'd be less benefit from input costs as you lap over the lower cost from last year. Now that is one reason also as Jeff pointed out, we're implementing additional cost reductions or restructuring actions to manage the situation.

Speaker 10

All right. Thanks, Jim. Thanks, everyone. Good luck.

Operator

Our next question comes from Adam Baumgartner from Zelman and Associates. Please go ahead with your question.

Speaker 7

Hey guys. You talked about the price or the cost piece on a year over year basis maybe being less of a tailwind in the back half. Are you actually seeing input sequential input cost inflation as we've gone through the year so far?

Speaker 2

Prices have been fairly stable. I mean, we buy a lot of pieces. So there are some that are going up. We'll have to see how they evolve and where they're going to go. But again, as you come out of these cycles, they're all going to go up.

Speaker 2

And so we have to manage our way out of it when it occurs.

Speaker 1

Yes. The key point, Adam, was that we've been very consistent. As you see the lower costs flowing through compared to last year, the high point was going to be in the Q1. We saw a little bit less in the Q2. I would expect that to continue as you go into the 3rd Q4 as well.

Speaker 7

Okay, got it. And then maybe switching gears to laminates, that's been a good part of the story. I guess, where are you seeing from an end market perspective the most adoption there or sort of penetration? Is it in single family new construction or home improvement or both? I guess, just some more color there would be helpful.

Speaker 2

It's really broad based. What's happened is that laminates becoming accepted markets, Builders are using it more than they have. In retail, the retailers are also picking it up and utilizing it. And then who am I missing? The commercial business doesn't use it at all.

Speaker 2

Is it a very limited is it? Our laminate, we have unique technologies that makes our laminate look better and different visuals than other people can make. And so if in the world markets as well as the U. S, we have a huge share of the mid to upper end part of the laminate business and we have none of the commodity at the bottom. Our equipment is different, our products look different and the value propositions are different.

Speaker 7

Okay, got it. Thank you. Best of luck.

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. Based on some of our work and talking to the channel, feedback from the field, it indicates that you've gained some market share this year. And wanted to see if you could clarify what gains you're seeing either by channel or by product categories and how sustainable you think these gains may be? Thank you.

Speaker 2

We've been aggressive in the marketplace, like everybody else is being in the market. We have good relationships with people. We are bringing products and value propositions that are different. We've been investing through the downturn in our sales and marketing activities. We continue to provide merchandising and promotions to help them maximize their business.

Speaker 2

And I think we're being rewarded in some places for that and increasing our distribution. We have things like with the freight and all the parts, our ceramic business, we have been able to satisfy the high end market of ceramic, for instance, in the commercial channels, where there's been disruptions in timing. We've improved our styling and offering, so we've become alternatives for higher end Italian tile, for instance. So we're taking the right actions in each product category, while at the same time, we're managing our costs and cutting our costs. And it's the management is really doing an excellent job.

Speaker 1

Another good example, Catherine, is in Europe, in ceramic, with energy costs coming down, we are able to level the playing field and be more competitive in that marketplace. And we saw that in the quarter where we proved over Q1 and from a unit perspective and a cost perspective.

Speaker 2

So just some more on Europe. In Europe, when gas prices were $300,000 the material prices were high. I mean, our ability to compete was really hurt. We didn't hedge any of our gas prices, so we were paying premium prices for everything. So I mean, there's a huge change in our capacity to compete in the marketplace today in Europe, for instance, than there was a year ago.

Speaker 11

Okay, great. I have just a clarification from your press release yesterday afternoon. And one of the items you said in terms of the cost cutting measures was leveraging technology to lower administrative cost. How much of this could you clarify more? Is this a euphemism for AI and incorporating that?

Speaker 11

Just help us understand a little bit more about that phrase. Thanks so much.

Speaker 2

AI, we're all looking at trying to find ways to use it. We're in initial stages of understanding it. We're going through training programs with different parts of our organization to try to utilize it. We think it's going to help do much more in-depth analysis and see trends that we haven't seen before. So we're investing in it, but we're really at the front end and the opportunities are significant.

Speaker 2

The general businesses, we continue to improve our internal information systems and we keep using them to reduce our administrative structures and respond rapidly.

Speaker 11

So you're not just to clarify, you're not to the point of having AI be part of cost improvement plans quite yet. Is that a fair statement?

Speaker 2

There's ideas, but I can't say that they have made a major change in the cost structures up to this point.

Speaker 11

Okay, great. Thank you.

Operator

Our next question comes from Rafe Jadrosich from Bank of America. Please go ahead with your question.

Speaker 8

Hi, good morning. Thanks for taking my questions. I just wanted to follow-up on some of the productivity gains that you've spoken about and how that carries into the remainder of this year and into next year. If we see volume continue to decline and let's say it's flattish next year, do you think your productivity gains are still enough to drive margin expansion? And then within that, can you just talk about how versus that $50,000,000 you talked about in the second quarter, how do we think about the gains in 3Q and into 2024?

Speaker 2

Just from a general point of view, then I'll let Jim try to give you some more view. When the volume is going down, you have to make all these cost changes to try to keep the you don't get any benefits in upticks. What you're having to do is trying to cut the costs out to manage the lower throughputs and pull them down to keep them in line. Now as we come out of it, what will happen is as the volume goes up, we're going to try to limit the expansion of these costs and leverage the margins and get them back to double digits and higher from where

Speaker 1

we are today. Certainly, volume is the story, Rafe. As you look for volume to pick up, you also are able to run the facilities at a more steady state. Therefore, you have less interruption and less shutdown costs, which certainly helps from an unabsorbed overhead perspective. From a productivity view, going through this year into next, we would expect all the businesses are continuing to bring ideas forward on cost reductions as I talk about CapEx, for example, about 45% of the capital spending is around cost reductions and product innovation.

Speaker 1

So those will continue to evolve as we go into next year. And as I pointed out, on the restructuring savings, of the $100,000,000 we just announced, only $20,000,000 to $25,000,000 will be really recognized this year, and we'll still have a little bit of a carryover from the $150,000,000 dollars that we originally announced last year.

Speaker 8

Okay. That's helpful. And then just on the pricing side, as you look across each of the three segments, I know on a year over year basis, it's down. But sequentially, are you seeing any type of stabilization? And then just to clarify on an earlier question, there you have not seen any impact yet from the higher shipping costs in terms of competitors reacting to price?

Speaker 7

Not yet.

Speaker 1

Not on the competitors, no. On your sequential question, So the biggest move was from Q4 to Q1. Q1 to Q2, though, there are some declines mostly in the price area, but it's certainly moderating as you go sequentially through the year, but you're still seeing some declines.

Speaker 8

So 3Q from 2Q into 3Q, you'd expect sequentially down just still down, but less than it was down 1Q into 2Q?

Speaker 4

Yes. Okay. Thank you.

Operator

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

Speaker 12

Thanks for taking my question. It's just a follow on to the last one, which in mix, is mix getting and I know it's negative year on year, but sequentially, is it getting worse or better in your 3 major segments?

Speaker 1

Mix is a tough one because you have not only product mix, but you also have channel mix. So as we've said, as commercial slows, that will have a negative impact on mix, as Jeff talked about the commercial market earlier in the call. But on the flip side, on the products, we because of our investments that we have made, we are really trying to leverage that to see stronger mix. So you have the combination of the 2. So as we look forward, price and mix, it's more on the pricing side.

Speaker 2

As we said, we think we're going to see the conditions. We don't see a significant change as we go from Q2 into Q3 and even into Q4 this year.

Operator

And ladies and gentlemen, with that, we'll conclude our question and answer session. I'd like to turn the conference call back over to Jeff Lauberbaum for any closing comments.

Speaker 2

We're confident in the long term fundamentals of our industry. We are well positioned to take advantage of the recovery of the housing markets and we expect there to be some different timing of how they come out, but they're all going to come out and go back to more normal things in the next few years. Thank you for taking your time and spending it with us.

Operator

Ladies and gentlemen, with that, we'll conclude today's conference call and presentation. We do thank you for joining. You may now disconnect your lines.

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Earnings Conference Call
Mohawk Industries Q2 2024
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