Q3 2019 Earnings Call
I'll like to welcome everyone to the Mohawk Industries third quarter 2019 earnings Conference call.
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So with this year.
As a reminder, ladies and gentlemen, this conference is being recorded today Friday October 22019.
Thank you I'd now like to introduce Mr. can heal skip Mr. He will skip you may begin your conference.
Thank you good morning, everyone and welcome to the Mohawk Industries quarterly Investor Conference call. Today, we'll update you on the company's third quarter results for 2019 provide guidance for the fourth quarter.
I'd like to remind everyone that our press release and statements that we make during this call may include forward looking statements as defined by the private Securities Litigation Reform Act like 95.
Subject to various risks and uncertainties, including but not limited to those set forth in our press release or periodic filings with the Securities Exchange Commission.
This call May include discussion on non-GAAP numbers for a reconciliation of any non-GAAP to GAAP amounts. Please refer to more form 8-K in the press release any investor section of our website. The key speakers today or Jeff Lorberbaum, Chairman and Chief Executive Officer, Chris Wellborn, Chief operating Officer, and Glenn Landau Chief Financial Officer.
I'll now turn the call over to Jeff for his opening remarks, Jeff. Thank you Kim.
Our third quarter operating results were in line with our expectations. So we're not satisfied with our performance.
Our sales were 2.5 billion roughly flat as reported on a constant basis.
Adjusted operating income for the period was 250 million or 10% of sales compared to the prior year. The U.S. dollar strengthened creating a 35 million dollar impact on our translated revenues.
Anticipated our U.S. businesses presented the greatest challenges during the period, given soft retail demand the impact the Belviq T. A stronger dollar and access ceramic inventory and the industry.
Lower interest rates in the U.S. or positively impacting housing starts and home sale in many believe this could be the beginning of an improving housing market.
During the period duties on imported ceramic tile were increased by an additional 104% which were largely stop shipments coming into the market.
Trends in our other major markets weekend, creating a more competitive environment in most regions significant political and freight uncertainties are affecting consumer confidence and spending.
In response to economic concerns central banks in many countries are lowering interest rates to stimulate growth. We expect the present conditions to persist in the near term and will further adjust our strategies as needed.
We are progressing on the initiatives to improve our business with the most significant of these being aligning the ceramic production with demand of the U.S. realigning, our north American carpet operations.
Demising, our LD t. manufacturing and ramping up our new plants. In addition, we're entering new product categories, introducing innovative product extensions and optimizing our recent acquisitions.
We are investing in more sales personnel and marketing to increase our penetration and new and existing products. We continue to streamline our operations to enhance efficiencies and were leveraging automation and process enhancements to lower our cost.
Free cash flow for the quarter is up year over year on our balance sheet remains strong.
At the beginning of the third quarter, we purchased over 740000 shares for approximately 91 million under our stock purchase program.
For a review of our financial performance during the period I'll turn the call over the glass.
Thank you, Jeff and good morning, everyone moving right into our financial performance and year over year bridges as Jeff shared third quarter total company net sales were 2.5 billion roughly flat on a constant basis compared to prior year or down 1% as reported year to date total company net sales were up 2.8% on a constant basis and flat asked.
Reported through the third quarter organic growth in legacy businesses was down 2.5% in the third quarter on a constant basis, bringing our year to date legacy growth down 1.6% versus the first three quarters of 2018.
In terms of earnings the company's adjusted operating income was $250 million in the third quarter or 9.9% of sales. This is off 242 basis points from the third quarter last year, largely due to weaker ceramic volume as expected with that said the company's year over year decline in margins improved modestly on a sequential basis by fit.
18 basis points, which represents now three consecutive quarters of improvement.
Ritchie from the prior year third quarter adjusted operating earnings were impacted by one lower overall volume of $16 million largely in flooring, North America, and global ceramic and associated market related shutdown costs of 9 million all in our global ceramic segment to match our supply with our demand in order to manage.
Our inventories in the U.S.
An increase of inflation of about $19 million due to higher wage higher wages and benefits, partially offset by lower raw materials in erosion in price mix of 15 million largely in our flooring rest of the world segment at input costs have eased and $10 million higher spending in essence, DNA as other ER and other due to invest.
In some sales and talent and marketing to drive sales, including product rollout initiatives and new startups moving to the positive offsets productivity, including low to lower startup cost swung positive by $8 million versus last year due to better utilization and nonrepeating onetime costs Lastly, FX translation.
Impact was unfavorable by approximately 3 million.
Still at the enterprise level SGN a per net sales across the enterprise was 17.8% excluding unusual items special and unusual items in the quarter consisted of approximately $10 million in restructuring and integration costs impacting operating income primarily in flooring, North America, which most was call cash.
And $65 million were 43 million after tax write down of our investment in the Chinese supplier in the other income line as a consequence of the September ruling by the U.S. Commerce Department imposing an incremental 104% countervailing duty on ceramic title effectively stopping Mohawk.
Purchases from this Chinese entity.
With this partially offset by about 8 million due to transaction transactional FX on in other income for a total special and unusual items of 66 million before tax.
Back to our restructuring and integration for the full year, we expect to complete the 94 million as previously disclosed this year plus a further 15 to 25 million some of which may fall into 2020, and as we shared last quarter. The cash component of the restructuring of approximately $30 million to $35 million should be recovered in about a year as lower costs.
Adjusted EBITDA was 398 million or 15.8% before interest expense of 9 million, which was flat with last year. The effective tax rate for the quarter was 18.3% and is expected to move into a range of 17% to 19% in the fourth quarter driving full year guidance down to the 19% to.
80% range finally, adjusted net earnings per share was $2, a 75 cents in the quarter down from $3.29 or 16% versus last year.
Turning now to the segments global ceramics delivered sales of 916 million, an increase of 4.3% on a constant basis versus last year or 3.5% as reported.
Operating income on an adjusted basis was 86 million or 9.3% of net sales down from 13.4% margin last year, primarily due to weaker demand at higher U.S. inventories associated with duties.
Compared to last year inflation was 18 million higher driven by higher material cost and wages volume was softer by $11 million inclusive of 9 million in downtime sales and marketing costs were up 8 million and price mix slipped 2 million all of this partially offset by improved productivity and lower startup costs of $6 million.
FX was neutral in the quarters.
In the flooring North American segment, the business showed better overall performance with sales of 1 billion down 4.4% versus last year as continued weakness in soft surfaces were partially offset by solid laminate performance and continued significant growth in LPT.
Adjusted operating income improved for the second quarter in a row sequentially as flooring North America earned 84 million or 8.4% of net sales in the third quarter cutting the year over year deficit $20 million versus 47 million in the second quarter.
Compared to last year volume accounted for the majority of the deficit down $17 million versus last year and inflation. The rest off a net 7 million with improved raw material costs, partially offsetting higher wages and benefits turning positive price mix improved 4 million in productivity less reduced startup cost was also positive.
Moving to flooring rest of the world. The segment had sales of $601 million up 2.5% versus last year on a constant basis, but down 1.9% does reported with legacy legacy sales holding that 0.4 on a constant basis.
Adjusted operating income came in at 89 million or 14.8% in the quarter off 100 basis points versus last year in a competitive environment compared to last year. The business continues to manage well in a more difficult environment supported by solid LBG laminate and installation performance. The primary headwind in the quarter was an erosion of price mix of 17 million largely office.
By relief and overall inflation of 10 million by lower input costs and modest improvements in volume and productivity totaling 4 million. Additionally investments in sales and product marketing were 2 million higher in the quarter and FX translation was unfavorable by 3 million.
Finally at the corporate level expenses and eliminations drove an operating loss of 9 million with the full year estimate holding in a range of 35 to 40 million.
Speaking now to the balance sheet receivables ended the quarter at 1.8 billion with days sales outstanding up due to changes in geographic and channel mix inventories ended the quarter at approximately 2.3 billion EUR 126 days flat with the prior quarter and higher year over year by $124 million do the ramp up of new investments acquisitions.
An increase source products.
Fixed cost for the quarter ended at 4.6 billion down 100 million compared to the prior quarter on capital expenditures of 125 million in the period lower than depreciation, which was 145 million and in line with plan.
For the full year Capex, we are on track to spend about 575 million, which is depreciation up to 595 million depending on timing.
Total debt was 2.8 billion at the ended the quarter down 300 million since exiting the second quarter with leverage declined to 1.7 times debt to adjusted EBITDA. We also closed our effort to renew our credit revolver for the full 1.8 billion for five years, plus two automatic one year extensions, so wrapping up the balance sheet.
Strong and getting stronger with free cash flow of 286 million in the quarter totaling 572 million year to date, giving us line of sight to our expected solid cash year. In addition to two at 700 plus million with that Chris I'll turn it over you.
Thank you Glenn.
And our level ceramic segment, our businesses around the world are under pressure caused by slowing economies excess industry capacities are creating more pricing and margin pressures and most of our markets commercial is outperforming retail as consumers are postponing purchases.
In U.S. ceramic retailers are promoting lower price points consumer shifting to l., BT and inventories remain high and the channels during the quarter, the U.S. and post increase tariffs on Chinese imports and further hanting dumping duties are anticipated at these levels you.
Ceramic purchases will be shifted to manufacturers around the world and should benefit Mohawk and other domestic manufacturers the excess inventories created by the tariffs will take time to be absorbed in the channel.
We expect the U.S. ceramic market to remain soft in the near term and we're taking actions to improve our sales and cost we're expanding our offering of stone looks and polished style and we are introducing additional value collections. We are adding more salespeople in major markets to increase our participation in commercial projects, we're rolling out new.
Online processes to make our customer ordering and pick up faster and easier to complement our ceramic offering we are selling dal tile LPTA for commercial applications and we'll introduce residential LDC collections.
We are initiating a limited launch of our new easy installation ceramic tile and we will expand more broadly at the beginning of the year. This patented system testing installation time in half with limited expertise and we are receiving positive feedback as we demonstrate the benefits, we're developing new markets for porcelain roofing and stick landscape.
Tiles, which overtime will create you sales channels for our business.
Our new countertop plant in Tennessee is ramping up processes and formulations are being refined and new products are being created utilizing state of the art robotics, we have begun manufacturing premium countertops that will improve our sales and mix. We're presently staff to operate three shifts and will expand production.
Further next year.
We have outperformed the Mexican ceramic industry by expanding our product offering and growing our customer base. We are hiring additional architectural reps to increase our commercial sales and enhancing our collections with premium porcelain large sizes and new wall tile products, we're supporting stores exclusively carrying dal tile products and expanded.
Our trucking fleet to improve service and cost.
The Brazilian market is showing some signs of recovery and we have outpaced the market with our premium brand and offering we have a strong position in the new construction market, which is outperforming residential remodeling, we're replacing an old ceramic lined with new porcelain production that is more efficient and will produce larger sizes went operational early next year.
To me President capacity needs. We have also restarted two previously I haven't lines.
The European ceramic industry has slowed with the overall economies and lower exports to other region excess industry capacity and inflation is compressing margins as we are selling more lower value tile, which reduced our mix commercial is outperforming residential and we're leveraging our comprehensive offering expanding our specifications.
Team and adding showrooms in major cities to grow.
Declining consumer confidence is impacting discretionary spending and his compressing the retail remodeling channels.
Our commercial technical tile porcelain slabs and outdoor products are gaining traction and strengthening our higher value offerings. We are reinforcing our leading design with larger porcelain SAB slabs four walls frinton registration that delivers more realistic visuals and slip resistant tiles for commercial applications.
Our Russian ceramic business is the market leader and is gaining share due to our national distribution system owned and franchised stores and project specifications teams, our technology design and scale give us the foremost position in the premium category as well as a cost advantage to complement our tile business we're constructing.
On a small sanitary ware plan that should be operational in the first quarter next year.
And our flooring North America segment, our margins have improved compared to the prior quarter due to increased sales lower material cost and operational initiatives, partially offset by lower product mix and inflation in labor.
Business has been reorganized by product category to enhance our sales product and operational strategies and execution.
By volume carpet still represents by far the largest category in the North American flooring market that was losing share to hard surfaces polyester carpet is continue to gain share in south market, which has reduced our overall product mix.
We have completed the expansion of our recycled polyester fiber to support continued growth in the category, we've expanded our offering of multi colored and pattern carpet as consumer preferences shift from solid colors. We are preparing our new residential introductions earlier. This fall so they can be in the market sooner next year.
The realignment of our residential carpet manufacturing will be largely complete in the fourth quarter and will prove our cost quality and service. We are aligning our operations for lower residential carpet volumes and utilizing our best assets. We have closed higher can cost can extrusion and dying assets and concerns.
Today that yarn and tufting production.
We have increased automation and upgraded assets to improve our backing in yarn costs beyond asset rationalization, we have enhanced our continuous improvement processes to increase efficiencies and process controls.
Commercial business continues to outperform with carpet tile and LPT growing fastest.
We are expanding our sales organization and increasing our carpet tile manufacturing, we have broadened our carpet tile offering with new pattern technology with unique visuals and value alternatives, we're launching more flexible LPT options for commercial that provides acoustic advantages and are more comfortable under foot.
During the period L. B T cells outperformed the other categories with demand remaining strong and ill be t. operations continued to improve production volume speeds and costs one of our BT line to specialized on Richard products, while the other is producing flexible products, which with each providing unique features for different.
Requirements.
September we set a record for Richard production levels and the flexible line is now running at comparable speeds to our European operations.
Hi, Richard Lv Tea line is focused on the production of SBC, which is the fastest growing category today.
We continue to transfer operational improvements that have been executed in Europe to increased throughput and introduce additional features we have specific ongoing actions that will further increase our output and lower our cost through the first quarter to utilize our increasing production we are introducing new products and features.
There are best friends for both retail and commercial markets are manufactured sheet vinyl sales continue to grow as we broadened our offering and expand our position in the multifamily in home center channels.
We expanded our waterfloods laminate offering and use our premium laminate collections is extending throughout the home in the remodeling and new construction channels. Our Rep would collection is providing and desirable alternative for both Lv Tia natural wood with its superior scratch and Dent resistance stated the art visuals and greater back.
Yeah.
We have developed proprietary technology, so that our laminate better replicates real wood and has superior water resistance to support our laminate business. We are upgrading our HTS manufacturing to increase our capacity and improve our cost.
In a slower environment, our flooring rest of World segment delivered solid results driven by product innovation cost improvements new businesses and acquisitions, our new LPT sheet vinyl laminate and carpet tile operations are making progress in reaching our expected levels.
In the laminate, we outperformed the market as our new premium products with waterproof features gain momentum and improved our mix. We have introduced the signature collection, which sets the standard for the most realistic visuals and we're adding our water from technology to most of our products. We have further increased our direct distribution footprint with the acquisition of our eastern.
In European distributor, our direct distribution strategy positions us closer to our customers and provides them with greater service and value.
Russian laminate expansion is operating at expected levels and our sales are growing as we expand our customer base.
As our Lv T. production increases, we're expanding our product offering and sales to grow all segments of the market in rigid we're introducing new collections with in Boston registration to utilize our increasing capacity, we continue to enhance our line speeds yields and formulations to improve our cost position. This process will continue.
Into next year, when we anticipate achieving our plan production rates and costs to increase our distribution, we're offering retailers fashionable products with better value service and inventory turns to enhance their results our sheet vinyl business is performing stronger as our new Russian plant expand sales and volume increases.
The new plan has freed up capacity in Europe , So we can expand our offering and customer base.
Our installation business is performing well with volumes at historically high levels. Our margins remain good even though pricing has declined along with lower material cost our panel business has slowed reducing our pricing and volume, partially offset by mix and lower materials to further improve our cost this year, we're expanding our entire.
On a full production next year, we will increase our use of recycle wood and startup and new plant that generates energy from waste would.
In Australia, New Zealand the integration of our acquisition is largely complete while the regional economies have softened interest rates have been reduced and there are some signs of an improving housing market to increase our market share.
We are upgrading our hard and soft surface product offerings, we are investing to expand our retail distribution and commercial carpet tile production. We have completed the closing of high cost assets in Australia, which will benefit our results moving forward with that I'll return the call do you Jeff.
Thank you.
We see the present market conditions, continuing and were taking actions to better position our business for the future. We're investing more in sales and marketing to expand placement of our products and increase the utilization of our new plants are new Greenfield projects will progress.
Sales and cost improve our LPT productions, improving and increased distribution will follow our us in your European ceramic businesses are being impacted by lower market demand and we are reducing inventory levels expanding product offerings entering new categories, the restructuring of our us carpet.
Operations will be substantially complete this year will benefit our costs next year, taking this into account our EPS guidance for the fourth quarter is $2 in 13 cents to $2.23 excluding onetime charges.
We will adapt our business strategies to the future circumstances as required next year, our business will benefit from our new products higher utilization of our startups and cost reductions we've taken in 2019, our results and balance sheet should improve with strong cash generation.
To take advantage of future opportunities, we have a strong global management team and they are focused on enhancing our results and optimizing our long term profitability.
With that we'll be glad to take your questions.
Ladies and gentlemen at this time, it's really tough question.
Stores in the number one on your telephone keypad.
We request that you alluded yourself to one question. If you have additional questions you may reenter the queue by again are wondering your telephone keypad.
Your first question comes from a lot of John Barber with Stifel. Your line is open.
Thank you good morning, and I wanted to focus.
On the North American revenue performance, which I think was.
Down just a little over 4% in the quarter versus the prior quarter second quarter, where was down 7%.
Is there anyway, you could give some more detail on sort of what drove that in terms of lamina versus the bill VP and then.
Yeah. It was carpet down about similarly, I guess and then.
So what where we sit today in terms of sourced LDP sales versus produced and I appreciate the record comment but.
Richard production, but I'm not sure how to quantify that thank you.
The carpet industry remains under pressure and is losing share.
This trend declined by 7% in units.
With commercial outperforming residential pricing pieces.
We see housing sales and remodeling could improve as we go forward.
Let me take manufacture the other businesses the.
Laminate business doing well as we introduced new products that are going into different markets and satisfy all the different markets acting as an alternative to the other waterproof products in the category.
Let me take continues to increase as the sales those up as the production goes up we are increasing new products into the marketplace with different visuals and performance features which will help us more next year that immediately as we go through.
We think that the throughput of plants going to keep going up and we're aligning new customers to use it next year as we go forward.
Well I Miss.
It Jeff on laminate I thought I heard in their particle board expansion that was as I write is that in the U.S. or in Europe had been worried a little but the U.S. laminates production rates and that sounds like a reasonably strong.
The us.
Board, which will make the core products and we have exceeded the capacities of the plants. So we are.
Upgrading them in order to increase the throughput and lower the cost to support the business.
Hi, John just just also comment that preeminent premium laminate is growing as an alternative for what it and lbd, while the lower end laminate is declining.
The technologies, we use that make it very realistic as an alternative to would it has superior visuals scratch resistance water resistant so we're doing quite well.
And then lastly quickly Chris.
So so what can you see or discern in terms of industry ceramic.
Inventory in the United States, where do we said is that getting.
Better I appreciate you won't see a benefit until we get a 2020, but is there any improvement yeah. I think it's a good idea to first explains the difference between our company in the industry, but let's answer your question first the industry.
We don't really know exactly what the inventory levels shows we only see important volume not the actual inventory. What we know is that this year the Chinese inventory spikes in front of these terrorists and our customers are telling us that they have a lot of inventory.
Going forward that will be an opportunity for us as those Chinese inventories deplete, we have options to replace those with our.
Internal production and we have a very short supply chain, which should put us in a position as the industry inventories to please.
Thank you and good luck. Thank you.
Your next question comes from Stephen Kim with Evercore ISI. Your line is open.
Thanks, very much guys appreciate it encouraging signs, particularly in flooring North America I.
I just wanted to make a comment.
As well as a question Mike My comment both about making permanent adjustments in capacity.
First the comment you been implementing what I would call.
Have a formalized restructuring program in carpet this year and you've given a lot of qualitative commentary about the rationale in the actions you're taking but unlike we get with a lot of other public companies restructuring plan for street hasn't had a set of quarterly numbers to model with and track your progress.
Thanks, operator, and I like your risk kind of.
We lost deal for a minute.
Oh on Pollo dies for that I guess, what I was saying is that we don't get from you a good sense of in this carpet restructuring what the ultimate annualized savings opportunity as and how much should land in one quarter and I think if you could do that I think it would really help investors with the medium to longer term opportunity a prognosis.
This or making that projection.
So in a related way my question is in ceramic.
What would you need to see Chris with respect to your assessment or your ability to assess the supply demand in the industry to embark on a restructuring program in ceramic where you take out some older capacity to accelerate the inventory decline much like what you are currently doing in carpet.
Okay I can answer that so this is what we have going on in our global ceramic.
Generally we have slower economic conditions and greater competition in the market. If you look at the U.S., it's mostly impacted by L. BT growth excess inventory from tariffs and the stronger dollar and if you look at Europe , it's impacted more by slowing economy and lower expert.
Ports to other regions and in that environment as you know, which we expect to remain for some time, we have taken actions to reduce our inventories.
And thats contributes to the favorable cash flow that you see.
Now going forward, we're taking a lot of actions to improve our business, we're adding salespeople why we're continuing to reduce our internal cost we're introducing.
Products that are alternatives for imports.
We're introducing pioneering really new easy installation tile roofing and outdoor products.
And at this and what we're looking for then is we've got our inventories in good shape, we will by the end of the year, we're about to wrap up with all these new products and salespeople and we Havent think opportunity to take share from these imports and I think as you go through the year. Our hope is that these things.
Q again and that we are able to use our capacity.
Got it so we really shouldn't be expecting.
A significant restructuring where you're taking capacity out.
Because you think your inventories are going to be pretty and good pretty much in good shape by the end of year, yes, hiring or imaging yeah in terms of being good shape, and we think we have opportunities to grow the business.
Yeah, no. That's that's very encouraging appreciate it.
If I could just a follow on in terms of LPTA in Europe , you made some comments about how.
We went down there recently, where you Jeff I think you mentioned that 90% of the market over there in LPT, it's actually flex, albeit not rigidity and I just wanted to clarify from your press release it sounded almost like you could make more rigid product over there then you can sell into you're increasing your salesforce over there so that that was a little surprise.
Think of it sounds almost like that means that when you started making the facility building the line that since that time to market for Richard in Europe grew slower than you thought while in the U.S., obviously, the market's growing way faster for Richard So just wondering if you could clarify that.
The market in Europe is still primarily.
So bill and.
Theres click and not clip.
The rigid is a relatively limited share of the total market, but we think it's going to grow quickly our equipment that we put in will make either or as you go through so we're introducing new products in rigid and we're going to try to push the market to sell more rigid.
As we go but our equipment will make both.
The other side is the marketplace.
There's also selling much less of it it has about half the market share in Europe . It does in the us and the growth rates.
Less than half also so the markets are nothing alike.
Got it thanks, very much but I appreciate it.
Again, we ask the you please limit yourself to one question. Your next question comes from Michael Rehaut with JP Morgan Your line is open.
Thanks, Good morning, everyone.
Yep.
First I just wanted to hit on just trying to get a sense of.
Progress with LPT, and obviously you mentioned some encouraging.
Factoids about September production of rigid and also matching the European production.
When you look at.
The incremental line that.
You put together over the last year net they've been ramping.
Where would you.
Hey, the capacity utilization of those lines given the progress that you.
Highlighted so far on your press release today in your comments you should we think about the capacities capacity utilization is it is it.
The two lines in the U.S. in Europe are we talking about 75% or greater and similarly from a margin standpoint, how should we think about where you what margins those that production is producing.
You know is still below average or if it's at a higher level of capacity utilization is it more in line with the corporate average.
And you have to separate us in Europe , and the different pieces the us business is.
Is utilizing all the capacity as its running now and as it speeds up we have avenues to use to use it as well as the substitute other product categories, we have as it ramps up in Europe .
We don't source any products so as it ramps up we have to build the sales for it in front of it and you have to put the products in the marketplace. So in Europe .
We're going to get ahead of the production rate.
We're going to get ahead of the sales rate and it's going to have to catch up in the interim on the course, none of the cost. So what we want them because we don't have the throughput and then material formulations, where we want them and we've said we have ongoing programs week to week and I will go into next in the.
First of next year, and we expect to hit our targeted.
Cost structure sometime.
As we go into next year.
The other.
The other part is the mix on the products and the product mix you start out with.
Selling the products that use the capacity and then over time, you try to move the product mix up by selling higher value products, which takes time in the marketplace.
Okay.
That's helpful. I appreciate that Jeff and I guess, just one other one if I could squeeze one in please on b.
Price mix I believe you said that kind of netted out roughly neutral maybe it's just a slight headwind year over year I wanted to get a sense of sequentially.
How you're looking at price mix, how would win from Twoq to Threeq you in each of the segments than if thats still kind of a moving target and you know obviously, there's been some slippage there I was hoping if you could address each of the segments directionally sequentially where price mix.
Particularly mix is has trended in Threeq, you and how you see that playing out for the rest of the year.
Listen a general all the businesses the price mix is declining as the volume in the different categories are under pressure and as people to as as.
As our customers tend to use price to attract 'cause consumers on one hand and on the other as we tend to sell more lower value products to utilize the plant tire. So there are they're all going lower fill it add to that is that for for the enterprise, It's lower like Jeff said 15 million, but that's a largely in Florida.
The world, but that's with a lot of input cost easing. So I think offline, we could groups quarter by segment, but the theme is essentially that is that there's competitive marketplace out there.
Thank you.
Your next question comes from Phil Ng with Jefferies. Your line is open.
Hey, guys in the last 18 months or so you've obviously had a lot of headwinds whether its drawn down production with the downdraft demand price costs and startup costs.
No way on profitability when you can't look out to 2020 do you expect these headwinds to moderate and some of the self help initiatives kind of kick in and drop through to the bottom line, where margins could actually be up year over year next year you'd be helpful kind of.
Hi, all that together.
Let's see the market in general as we keep talking about is under pressure and we keep aligning the businesses with the markets. As we look forward you see us investing more in sales and marketing to increase our share both in existing products as well as to get these new factories up and running.
The positive pieces are the north American restructuring is going to start benefiting the business next year. The Lv T. lines will be operating more efficiently. These other plants, we're talking about well start adding value versus being a drag on the pieces and.
The marketplace will have to keep reacting to whatever happens.
Got it and just one last one Chris I believe on the call. You mentioned that you expect your inventory on ceramics to be in pretty good shape body ended the year.
If that's the case, obviously the back half of this year, you've had a big drag on production curtailment for ceramics should that be kind of like a neutral event. When we think about early next year, then well I think and the as we next year as we go into next year. We've got all these things to drive our business and how we utilize that capacity.
We will.
Really depend on how fast they ramp up.
Okay. Thanks, a lot appreciate the color.
Your next question comes from Michael Wood with Nomura Instinet. Your line is open.
Hi, Good morning, I wanted to shift gears to the carpet, particularly a nylon I'm curious how small that's the comments as a portion of your mix in carpet and can can you scale operations in nylon specifically enough to achieve their required returns that you have.
The nylon part of the business has declined and residential.
And we have another category that we compete against an island with we call Smart Strand, which has made out of try X to both of those things compete in the higher end of the business and we have a much larger business and try extra than we do a nylon and the residential category on the commercial side you have.
The nylon makes up the majority of it and still doesn't isn't changing.
Got it okay and it can you could you also just talk briefly about how you're running promotions in ceramic in terms of like how that would actually phase out once the inventory gets worked down thanks.
Well.
What we're doing in ceramic in some cases were running promotions with borrow in call we value engineered products to go after builder business that was pretty where they were previously using LPT. So that's one.
Product that we have offered for also.
Have products aimed at.
Getting the.
Product the Chinese product.
That will stop coming into the United States. So those are the two main areas.
Next question comes from Keith Hughes with Suntrust. Your line is open.
Thank you questions in ceramic I think you'd said it was $18 million higher input cost and the in the quarter.
Seeing that for the out couple of quarters, now, specifically, what product or what inputs or are driving that up well in particular in South America and in Europe , We had higher cost for energy is for one.
And then also the material evidence you on a global marketplace in the different places around the world, there's inflation in energy and as inflation on raw materials still occurring in most of the markets.
And if we look back at 28 change ceramic incurred about $100 million of higher input was at the same sort of things are was a different last year.
Mainly the input cost it globally like Jeff said has been in energy materials labor.
And then.
Several areas and one more on the material costs and ceramic in some cases, there's trucking costs that have also going up to move the stuff to the plans.
Which is also impacted material costs.
And I guess funnel course for Chris had been in this industry for a long time is going to be two years of.
Tremendous input cost inflation have you ever seen anything like this before.
Well I think the thing that as Jeff mentioned, one of the cost that really ramped up last year.
I was the transportation cost.
That was a significant cost increase.
And also the the material cost you had both of those.
Okay. Thank you.
Your next question comes from Truman Patterson with Wells Fargo. Your line is open.
Hi, Good morning, everybody first just wanted to touch on your fourth quarter EPS guidance, you know backing into it it looks like that implies your operating profit is going to decline about 20% year over year on much easier comps from the second quarter. So it seems to me.
The operations looks like they're going to take a another step back in the fourth quarter.
Could you just maybe walk us through what the largest buckets.
What's causing this in in that it also appears that.
Here the improvement in lead T, North America, and making some capacity rationalization, but it seems like implied in that guidance that north American margins might even take a step back as well in the fourth quarter. Just hoping you can help me wrap my my my arms around less.
Yeah, I mean, I think the message here and this is Glenn is essentially.
The fourth course played out as we expected.
The dynamics in the fourth quarter are the same as the dynamics in the third quarter.
And the biggest is in ceramics in volume.
And ultimately that and the downtime, we're taking against that volume to manage our inventories in the U.S. So those are those are the two key buckets that that the build that guidance.
There's really no more new issues, it's just the seasonally different quarter in a different amount of days and from there.
Filling the blanks.
Okay, Okay, gotcha, and thanks for that digging into North America, a little bit more the bumped up.
Margins bumped up 200, Bips sequentially. If you look historically that looks kind of inline to maybe a little bit below the normal improvement. If you look at a couple of years. It looks like margins are back sliding a little bit further.
You are mentioning positives in the North America.
Carpet restructuring that should benefit 2020, you've got better Lv T. manufacturing, we've also been hearing and channel checks layers.
Still some excess inventory there is some increased promotional activity capacity rationalization I'm really thinking when when you roll all the puts and takes up.
Should we expect third quarter margins to really be the floor, we can and we can ramp up and improve through 2020 or do you expect the pressures to kind of more than offset the positives and possibly a flat to down margins.
Yeah, I would I would think of this year is over we're talking about 2020 right now I think the Ford writers transitional the dynamics are the same it's a fourth quarter, but certainly as as we've outlined.
So.
We're going to have a tailwind in the things we can control in flooring North America and it will be key will turn profitable as Jeff said, the we'll get the benefits from restructuring and outside of economic conditions. The there is a tailwind to improve margins from there where they are today.
Okay. Thank you.
Your next question comes from Tim Waters with Baird. Your line is open.
Yeah, Hey, Hey, everybody. Good morning, just maybe shifting gears to to the cash flow statement.
I guess first any sense for what preliminarily cash capex might look like in 2020, and I guess secondarily. How are you kind of thinking about just kind of using or kind of kind of utilizing just some of the increased free cash flow that you should generate in the back half of this year and into 2020 just.
I'm wondering you probably won't pay down debt you've done a couple of acquisitions, but.
Is there an increased emphasis on potentially using some of that cash to buy back stock.
On the Capex next year will be less than depreciation.
As a FICC as part of its going to be spent on projects that have good paybacks and reducing our costs and each pieces with limited risk in them and we think we have a number of those identified able to do.
On the.
The stock buyback we.
We are going to.
A complete the stock purchases over time as we have said and we havent made any plans to to add to it will decide that in the future when we get there.
Your next question comes from Justin Spear with Zelman and Associates. Your line is open.
Hi, Good morning, guys. Thank you.
Just wanted to take a look under the hood at flooring rest of world and the global ceramic business, you've touched on quite a bit but we have these softer international market conditions.
If you give us a sense for how you see.
Profitability trending in those segments as we look into the fourth quarter, particularly in the 2020.
Given given what you're doing in terms of productivity given what you see if the flooring rest of world business has been pretty sound, a little weaker into the third quarter, but just give us a good sense for how you view that business casting into 2020.
So when you look at flooring rest of world. The European economy is slowing a little but each of those countries in markets are different and our businesses are performing well in each of them.
Our investment and innovation cost in new businesses are enhancing our results.
And we're well positioned in each of those categories laminate LDP and sheet vinyl outperforming the best and our new operations are making progress.
That would be on the flooring rest of world and on the ceramic side I think it's just like we talked about so far Europe's been affected by slowing economy, particularly Italy, Germany, and they're also the European ceramic business has been impacted by lower exports to other region.
Now in that context.
We're managing our business well.
Commercial is doing better and just like in the U.S., we're increasing our sales organization and new showrooms.
We're also selling more mid and low end product to increase sale.
So we're doing a lot, but we think the economies will still be relatively weak.
Okay. So.
In terms of line aside.
And the inventory management feel good about the direction feel good about summit investments are doing to kind of Rev up growth, but I'm still trying to get a sense for do you think that flooring rest of world margin.
And I know, it's doing relatively well, but in view of a if trends remained soft as they are you think margins will be stable.
And with whether casting this year as we think about next year.
Uh huh.
You have also these new projects coming on you have LDP that the lines going to change from a drag to a positive you have part of the question sheet Russian sheet vinyl plant.
As come up and it's kind of slipped from two of positive.
You have.
Laminate businesses, which we put investments in a while that they're running well and using the capacities and we have put more capacity in Russia, and it's it's doing okay.
But there are drags from the economy. So you have the cotton drags on one side and you have the various positive things we're doing on the other well have to see how they all balance out.
Excellent excellent and then last lastly, it kind of line of questioning on flooring North America.
And I know your sort, we know you source Lv T. and we now you're bringing up your internal production, we are still sourcing quite a bit of LDK from what I understand.
Now the tariffs in place just thinking about the implication of a tariff on that source product on your North American margins this year and potentially the next year and in terms of.
Of that business looking separately after that at price mix input cost and productivity what was that in the quarter and what's expected.
On forward.
Hi.
I I just didnt I'll, just make one comment on that tariffs on the far North America, it's not been and nearly the issue that we had ceramic ceramic the tariffs are hundred 30% in North America. They were 25% some of which was discounted back. So I don't think that tariffs have been such a big impact it's been.
An impact, but not as great you have the Chinese currency got weaker and the.
Suppliers absorbed a portion of it as you go through and we're in the same position as the rest of the market and there is also.
Production moving trying to move to other places to be made so we're in the same boat as everybody else.
Okay, and then just in terms of the price mix input cost and productivity in flooring North America can you.
Relay, what those were in the quarter.
And what's expected going forward.
That's a as I said earlier price mix turn turn positive.
And productivity.
Factoring startup costs also were positive. So yes, we have the the volume challenges, but from a mix standpoint too is the biggest driver keeping keeping the overall segment across the categories.
In a flat to positive mode of about 4 million.
Excellent. Thank you guys really appreciate it.
Your next question comes from Mike Dahl with RBC capital markets. Your line is open.
Hi, Thanks for taking my questions.
First question is really focused on the European environment then.
One of your competitors earlier this week talked about how they were seeing excess Chinese lv t. capacity and how that was starting to.
Appear in Europe and caused some disruption in Europe as that entered the market can you can you comment to what extent you've seen.
LPG imports into Europe pick up and have an impact on your business.
Okay.
Lv T. from China has increased as the market has increased.
We believe we are positioned to compete against it in Europe , where manufacturing all of the product was selling.
And as our new line comes up in our cost come down we think that we can offer retailers or buyers of the product competitive products with much shorter lead times more flexibility.
And we think we can increase our position in the marketplace.
Okay got it my second question.
Two two parts on ceramic the first is just a.
A little more colour on the impairment.
On the on the Chinese asset.
Post the anti dumping rolling can you can you just talked about how how much.
How much you, we're importing through that business and whether or not there is a you know a go forward impact on how we should think about sales and margins in the in the ceramic segment as that's been.
That's been impaired and potentially redirected and the second part.
Bigger picture around ceramic I know you talked about the inventory levels.
Specifically to the.
The Chinese ceramics, but as you've had the anti dumping go into effect that hey, what what have you seen in terms of import activity.
From other countries taking that place.
And and how do you stack up competitively compared to that.
Okay. So firstly the investment that we wrote off is something that we've had since 2010. It was it's a factory where we brought.
Imported product and that has slowly decreased overtime and that production can be brought into our us factories. So that's the that's.
Only story about the that investment.
The.
Chinese inventories the they spiked as those tariffs were about ready to be implemented.
Last wave, let's say of Chinese.
Inventory was brought into the system and that will slow work its way down now what'll happen is that source of supply will get replaced by.
You asked manufacturers will be part of it at a loss so impact, Brazil, Turkey, India and right now, it's that's being made a little easier because the dollar is so strong.
But we should benefit us and U.S. manufactured should benefit from some of it.
Okay. Thank you.
Your next question comes from Matthew Bouley with Barclays. Your line is open.
Hi, Thank you for taking my questions.
You mentioned kind of seeing those signs a the residential market improving in the U.S.
You know how should we think about how that might flow into your business timing wise, if you could remind us maybe which product categories, obviously carpet ceramic tile et cetera on the homebuilder side, where you might see kind of the greater benefits of an improving housing market in the U.S. Thank you.
What was said was in the last few months as you guys get the numbers, we've seen an improvement in the housing sales and improving in the housing sales should benefit us if you look at new home sales.
Flooring is the last thing this put in before the houses complete so if it takes nine to 12 months to build the house or 18 months.
Flooring is the last thing that's put in it as it has different categories. You know that all the different categories are used in the homes as you go through.
What we're seeing.
Increases and then all the different category I mean increases the.
All the different hard surfaces are used in carpets used in it and so if it goes up it should positively impact all of the pieces.
Okay understood and then just back to Lv tea in the U.S. again, I think you mentioned, Jeff that you've got some visibility to reduce costs in Q1.
And you kind of also mentioned hitting that targeted crop cost structure at some point next year can you just elaborate a little bit on that or around the timeline to turning a profit in that plant and what type of margin you you can actually do with the LPTA in the U.S. Thank you.
This is what we said is that next year, we think that.
We'll turn a profit in it we have put it by the quarter. In addition, as the piece as our manufacturing improves it has to flow through the inventory. So it should the cost improvement show up about four to four months later in the back in the cost seats as you go through.
What we expect all through the year for it to keep improving and then even further beyond that we would expect the cost structure is to continue to improve incrementally and then over time, we change the mix in the in the business to get the business to align you have to sell it at whatever.
Prices you need to get it into the marketplace quickly and then over time, you upgrade the mix, which will take more than next year as we do it as we go forward.
Okay understood. Thanks, a lot.
Your next question comes from John Lovallo with Bank of America. Your line is open.
Hey, guys I think you for fitting me in here.
Can you just help us think about the magnitude of the sales and marketing investment that you're making to expand the placement of your products and should we expect this to kind of ramp sequentially as we had through 2020.
We're putting.
And all the different businesses as you've heard we're putting more salespeople on and we're trying to be more aggressive in the marketplace as as we go through so theres a spike in it we're going to continue to monitor it and if we get the positive results will continue spending at those levels. If we don't will adjust the strategy.
And get in line.
Okay, and then maybe finally.
What percentage of your ceramic offers today or what you would consider to be value oriented and where do you think this this percentage could go over the next year or two.
We have.
Price points, we have price points up and down the spectrum and ceramic.
And I wouldn't I wouldnt over emphasize these lower price points were in selected situations, where we have opportunities we're targeting it because we are underutilized and our assets, but overall, it's not a huge piece of our production now, but it will get bigger and it will impact.
The margins and we're doing the same thing in Europe right is that we're being more aggressive as the industry slowdown, we participate more and lower value products. So it does impact the mix.
Got it thanks guys.
Your next question comes from Kathryn Thompson with Thompson Research Your line is open.
Hi, Thank you for taking my question today on carpet in the U.S. Yoo last year.
Great somewhat flattish to down a little bit and the overall industry expectation, which of course, it's behind it.
The industry contacts and Weve been very surprised by taking such a bigger like down this year I wanted to get your thoughts on that dynamic.
And what realistically area expectations looking beyond just the next couple of quarters, but.
What could the next d. as we look.
Two to two years down the rent.
If you look at the flooring market in the United States historically, it's grown greater than GDP over through the cycle.
I don't know what would have changed at that.
Flooring would not grow slightly more than GDP overtime.
Yeah.
I was talking about carpet carpets, nothing growing as fast.
It sounds like embody specific category not overall flooring.
I'm, sorry, so we're talking about a secular.
Change.
Okay harp, it has been decreasing and.
Don't see it changing.
The moment, what we believe is that the LTP at some point is going to plateau out. We believe that has probably slowing somewhat at this point from where it was and it will plateau and then things will go back to some sort of growth rate. This for leveled with a piece, but it's not going to stop tomorrow.
Uh huh.
Yeah.
Just once again, just a follow up to see if I can clarify.
Carpet is taking a bigger step down this year.
Well I'd be LPTA is growing at a pretty steady rate what do you think the percentage reasonably carpet should be two to three years down the line as we look at us it brought mix.
I don't have a number to give you.
Yes.
You can make up one as well I I don't have a number.
Okay on transportation odd fleets, then just a shortage of drivers this.
Then board inside for so many industries in construction.
What do you and manufacturing what are you doing to ensure.
The ability to key drivers and to give.
The ability and that labor force in the long term cost for that.
We have.
Done a few things one is that we have increased our internal trucking fleet in order to move a greater percentage of our products.
We think that we offer we've been able to staff our positions because of the.
Consistency of the routes and the ability for people to make money. So we've done better than the market in general to support our own trucking fleets and we've we've taken a larger percentage of it than has been going and then open market as the costs have increased.
Okay. Thanks.
That's all the time that we have for questions I turn the call back to Mr. Lorberbaum for any closing remarks.
I appreciate everybody joining us.
We have a lot of actions, we're taking to improve the business and our results. We think we'd have a lot of opportunities as we look going forward and we appreciate you being on the call would have a good weekend.
This concludes today's conference call you may now disconnect.