Q4 2019 Earnings Call
Good morning, My name is Lisa and I'll be your conference operator today at this time I would like to welcome everyone to the Mohawk Industries' fourth quarter 2019 earnings conference call. All lines have been placed on mute to prevent any background noise.
After the speaker's remarks, there will be a question and answer period, if he would like to ask a question. During this time simply press Star then the number one on your telephone keypad to withdraw your question. Please press the pound ski should anyone need assistance. During this conference. Please press star zero and an operator will assist you as a reminder, ladies and gentlemen.
In this conference is being recorded today February 14, 2020. Thank you I would now like to introduce Mr., Ken fuel scam, 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 results for the fourth quarter of 2019 in the full year as well like guidance for the first quarter. If this year I'd like to remind everyone that our press release and statements that we make during this call may include forward looking still.
Shipments as defined by 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 in the periodic filings with the Securities Exchange Commission.
This call May include a discussion of non-GAAP numbers for a reconciliation of non-GAAP to GAAP amounts please refer to them or form 8-K in the press release in the Investor section of our website.
A key speakers today, our Jeff Lorberbaum, Chairman and Chief Executive Officer, Chris Wellborn, Chief operating Officer, and Glenn Landale, Chief Financial Officer, I will now turn the call over to Jeff for his opening remarks, Jeff. Thank you Kim.
Fourth quarter adjusted results, whereas we expected for sales flat to last year.
The income of 205 million or 8.4% of sale and he PS $2.25 for the year. Our sales were 10 billion. Adjusted operating income was 938 million or 9.4% of sale and he P.S. was $10.04 our cash generation remains strong.
Operating a free cash flow for the quarter of about 440 million and 300 million.
For the year operating free cash flow for about 1.4 billion at 870 million or.
Our leverage is approaching historical lows, which provides us the flexibility to pursue additional opportunities in the period, we bought back approximately 23 million of stock for a total of 375 million since authorized.
We anticipate into our business.
As we anticipated our business remained challenged by soft demand greater competition and reduced production volume in the U.S. markets continue to be influenced by the strong dollar and the impact of L. B T on other product category.
Tumor confidence remains high and lower you as interest rates are positively influencing new and existing home sales U.S. tariffs on clickable Lv T. from China were centered in the fourth quarter and market pricing has declined for these products.
Imports of ceramic tile from China dropped off substantially in a fourth quarter and shipments from other countries have not offset which we believe is due to soft demand and a reduction in U.S. ceramic inventories.
Competition has increased in our global markets impacting our pricing a mix as we leverage higher investments in sales and marketing to drive <unk> growth.
Many countries, where we operate.
Our stimulating their economies with lower interest rates to encourage greater consumer spending and economic growth. This year in the near term, we still anticipate continued pressure in our markets and product categories.
Throughout the period, we implemented changes to increase sales and reduce costs, we've enhanced our LBC manufacturing in the U.S. in Europe and realigned our U.S. carpet operations, we have decreased our ceramic production and inventories are taking out a wood flooring plant in the United States than in Europe.
We are reducing the complexity of our operations improving processes to reduce costs, increasing automation to improve efficiencies.
We continue to improve the productivity in volume of our new LPT, U.S. countertop, Russian sheet vinyl and European carpet tile investments.
Our acquisitions in Australia, Brazil are installing state of the art equipment that will expand their product portfolios were introducing new design and performance innovations to enhance our market position and broaden our customer base.
To promote both new and existing products were making higher levels of sales and marketing investments.
For a review of our financial performance during the period I'll turn the call over to Glenn.
Thank you, Jeff and good morning, everyone moving right into our financial performance and year over year bridges as just shared in the fourth quarter total company net sales were 2.4 billion down 1% compared to prior year as reported and off approximately 2% on a constant basis, which we define as adjusted for FX and days for the full year 20.
The 19 total company net sales were flat compared to 2018 as reported and up 2% on a constant basis organic growth in the legacy businesses was down 3% in the fourth quarter versus prior year on a constant basis and down 2% for the full year compared to 2018 also on a constant basis.
In terms of earnings the company's adjusted operating income was $205 million in the fourth quarter or 8.4% off 140 basis points from the fourth quarter of last year, largely due to weaker volume and price mix, only partially offset by improved productivity, including including lower startup costs with that said the company you.
Year over year decline in margins improved on a sequential basis by 100 basis points, which now represents four consecutive quarters of improvement.
Ranging from the prior year fourth quarter adjusted operating earnings were impacted by number one lower overall volume $10 million largely in our global ceramic and flooring North America segments and associated market related downtime costs of $4 million all taken in global ceramics to match our supply with our demand.
Number two a modest increase in inflation of $3 million due to higher wages and benefits, partially offset by lower raw materials number three in erosion of price mix of 24 million largely in our for the rest of World segment. Following easing the input costs and 11 million higher spending and SGN engine, yes DNA.
And other due to investments in sales talent and marketing to drive sales moving to the positive offset productivity, including including load lower startup costs swung positive by $16 million versus last year due to better utilization and nonrepeating onetime items.
For the full year adjusted operating income was $930 million or 9.4% of sales off 250 basis points from prior year.
Staying at the enterprise level adjusted SGN a per net sales was 19.1% in the quarter, excluding unusual items up 180 basis points year over year due to higher sales marketing and merchandising expenses to roll out new products and to grow in new markets Inflations inflation acquisition lower volume and onetime.
Larger is also impacted the quarter.
For the full year adjusted EPS DNA was 18.4% of sales up 100 basis points year over year.
And just to be clear relative to the rollback of tariffs on clickable Lv tea products from China.
Prior to tariffs, we had already raised inventory significantly and has since reduced purchases in 2019, as we reduced inventory and ramped up our US production. We also have purchased from other countries. In this period. So the total gross rebate amounted to 13.5 million, which is in our guidance spread over three quarters and largely.
Offset by inventory value on hand.
Special and unusual items in the fourth quarter consisted of a 50 million charge for restructuring and integration costs, which most was noncash and divided relatively evenly among completing U.S. corporate realignment and rightsizing. The companies would manufacturing print footprint in flooring North America at flooring rest of the world.
As well as $136 million, a onetime tax benefit associated with the consolidation of business activities in Europe within a single operating entity to improve management and increased efficiencies also reducing the company's tax rate somewhat in 2019.
For the full year total restructuring and integration charges taken for actions and flooring North America employee rest of the world for $111 million of which approximately 41 million was cash.
And as we have said the cash cost associated with carpet restructuring of approximately 30 million will will be recovered as operational savings.
As lower cost pass through inventory in the first half of this year, reaching full run rate in the third quarter.
Adjusted EBITDA was 363 million or 15% before interest expense of 11 million for the full year. Adjusted EBITDA was 1.5 billion million 1.5 billion or 15.3%.
The effective tax rate on non not on a non-GAAP basis was 18.9% in the fourth quarter and 20.6 for the full year of 19. Finally, adjusted net earnings per share was $2 in 25 cents in the quarter down from $2.53 or 11% versus last year and for the full year.
Adjusted net earnings per share was $10.04 down from $12.33 versus 2018.
Now, let me turn to the segments and I'm only going to speak to the fourth quarter here. The global ceramic segment delivered net sales of $858 million flat versus prior year as reported or a decrease of 1.5% on a constant basis.
Looking at only at our legacy businesses sales decreased approximately 4% on a constant basis.
Operating income on an adjusted basis was 54 million or 6.3% of net sales down from a 10.1 margin last year, primarily due to increased competition and weaker demand in the U.S., coupled with higher inflation.
So compared to last year at the segment level inflation was 16 million higher.
Driven by higher wages and materials and benefits.
Volume was off 14 million inclusive of 4 million of downtime.
Sales marketing and other costs were up 5 million price mix slipped 4 million and this was all partially offset by improved productivity and lower startup costs of 6 million FX in the quarter was neutral.
Let's move to flooring North America the.
The business showed better overall performance with sales of 936 million down 4% versus last year as reported and down 5% on a constant basis as continued weakness in soft surfaces were partially offset by continued growth in LPG.
Operating income on an adjusted basis was $69 million or 7.4% of net sales in the fourth quarter.
Bridging from last year volume was down $17 million versus last year and accounted for the majority of the deficit price mix lag prior year by approximately 6 million raw material cost decreases offset increases in wages and benefits keeping inflation flat and productivity less reduced startup costs was better by 6 million.
Moving to flooring rest of the world. The segment had a solid quarter with sales of $630 million up 2.6% versus last year as reported and 3.7% on a constant basis.
Looking just at the legacy business sales were up 1.5% on a constant basis.
Operating income came in at 89 million or 14.2% of sales in the quarter, an increase of 140 basis points versus last year in a very competitive environment, mainly as a result of increased volume.
Going to the bridge volume was better by $18 million price mix slip by $15 million, but was largely offset by relief in overall inflation of $11 million drive driven by lower input costs productivity, including including lower startup costs was 3 million and investments in sales product marketing and other were 6 million higher in the quarter.
FX was again neutral for the quarter finally at the corporate level expenses and eliminations drove an operating loss of 8 million with the full year cost of 40 million.
Speaking out of the balance sheet receivables ended the quarter at 1.5 billion with days sales outstanding up due to changes in geographic and channel mix inventories ended the quarter at approximately 2.3 billion EUR 134 days higher in days versus prior year by approximately six days, but relatively flat in dollars as we continue to adjust our production to me.
Sure our sales.
Six assets for the quarter ended at $4.7 billion on capital expenditures of $140 million in the period lower than depreciation and amortization, which was 154 million.
So for the full year Capex was at 545 million lower than our DNA of 576 million as we efficiently managed our Q4 project spend in each of our segments.
Total debt was 2.6 billion at the ended the quarter down approximately 200 million versus the third quarter was leveraged declining 1.6 to 1.6 times debt to adjusted EBITDA wrapping up the balance sheet is strong and getting stronger.
With free cash flow of 300 million in the quarter totaling 873 million in 2019 capping off a very solid year at overall cash generation, so with that Chris I'll turn it over you. Thanks Glenn.
And our global ceramic segment most of our markets faced a combination of soft demand and excess industry capacity that is compressing market prices and margins during the quarter. Our us ceramic business remained under pressure from LPTA, taking share and high industry inventories from ceramic purchases ahead of parents.
Additionally to align our own inventory levels, we meaningfully reduced production in our north American ceramic plant, which increased our costs.
We have started to see some transit should benefit our business in 2020 compared to the prior year fourth quarter total use ceramic imports declined 17% with Chinese ceramic imports falling 90% lower interest rates and improving new and existing home sales should also benefit the market this year.
To improve our sales we are rolling out multiple new products and adding sales representative in design consultants in major markets, our new collections aimed at replacing imports are gaining momentum.
We increased productivity and reduce costs for our customers, we have streamline ordering processes and made picking up orders at our service centers faster and easier we continue to enhance our showrooms and galleries to better communication beauty and performance of our ceramic products.
During the fourth quarter, we initiated manufacturing of our new quick tile in multiple sizes and designs. Our proprietary product has been tested in both residential and commercial applications and has received positive reviews for faster and less expensive installation that is able to be walked on the same day.
We are launching click tile and our trade show this quarter and have already received commitments from major customers.
We are expanding our mosaic and wall tile offerings to meet growing demand for these categories. Our courts countertop sales continued to increase as we ramp up the productivity and throughput at our new Tennessee plant.
We're developing more sophisticated visuals to enhance our manufactured courts collections and improve our margins.
Sales of our large porcelain slabs from Europe are growing and we are increasing the sales about how branded LPTA products.
In Mexico, the economy continued to face headwinds due to uncertainty around us trade with the overall construction activity declining in the fourth quarter, we're gaining share by expanding our brands distribution and product offerings with larger sizes porcelain products and more comprehensive wall tile collection, we are in.
Creasing, our participation in the commercial markets and enlarging our base of stores that excludes we sell our products.
Despite a soft economy in Brazil, we had good sales growth during the period due to our strong brand and product offering in December we initiated production on a new porcelain tile line that produces larger sizes to expand our premium offerings to increase our sales and other south American countries, we are updating our showroom.
Pending distribution.
The southern European economies remain slow impacting our primary ceramic markets and industry pricing in this environment, we increased our volume even as lagging consumer confidence reduced demand in the larger retail remodeling channel we are expanding our activities in the commercial channels as well as outdoor price.
Thanks to extend our style leadership, we are introducing new premium products with the surface structures aligned with their printed designed to create more realistic visuals.
Our medium priced products have enhanced our results with new sizes and visuals sales of our porcelain slabs grew dramatically from a small base during 2019 with the products, gaining greater utilization and traditional areas as well as for countertops.
We are increasing our inventories are regional warehouses in Poland, Greece in Romania to expand our customer base with faster local service, we continue to specialize our plants by product type to optimize our cost and improve our competitive position.
In Russia, we grew our ceramic sales and a soft market our growth was driven by our unique business model that includes the industry's most comprehensive premium offering a national distribution network and and franchise retail stores and the strongest projects specification organization in the industry.
To further strengthen our position in 2020, we expect to expand the stores that exclusively stellar products to more than 400 locations across the country.
To support our growth, we're starting up additional porcelain production to make super large sizes, and a new plant to reduce coordinated premium sanitary ware.
And our flooring North America segment, we have executed many initiatives to align the business with the present market conditions, we faced a challenging market with Lv key growth is continuing to impact sales of other product categories as expected our pricing and mix remained under pressure as customers traded down and.
Certain levels raised the costs lower raw material cost during the period were offset by more competitive environment.
We streamlined our infrastructure by closing three plants consolidating high cost operations and reducing would manufacturing.
The effects of these actions will increase and flow through the inventory with full cost benefit in the third period.
To reduce cost we have implemented numerous process improvements executed machine modifications and increased our recycled polyester production.
We are leveraging automation and equipment advances to reduce comparable volumes with the smaller manufacturing footprint.
In the period, our residential carpet sales performed best in the new home construction and multifamily channels, our new carpet introductions were well received at the National flooring trade show and they will be in the market place early 2020.
We are leveraging our strengths and design and fiber technology to deliver differentiated new collections in both premium and value categories in the luxury and super soft categories, we've extended our multi color and pattern capabilities in our proprietary smartstrand silk collections.
Color Max Mohawks exclusive color blending technology is rapidly growing in the marketplace with its natural pallets that coordinates with wood and stone looks we've increased our recycled polyester fiber capacity to expand our participation in the fastest growing carpet category.
In commercial we are coordinating the colors and stylings of our carpet and LPT collections to enhance the design options. We have introduced award winning collections for schools and workplaces with nature based designs to increase our focus by channel, we're expanding our commercial sales organization and enhancing their skills, we continue to invest.
Just a new design capabilities proprietary carpet tile backings and immaterial manufacturing to create greater value for customers and improve our costs.
We have increased their production and speeds of our LBC operations and ongoing initiatives will further improve formulations and throughput. We're now operating as similar speaks to our European LBC operations. During the period us tariffs on clicked LPT were removed and the market has adjusted pricing to reflect this change.
To expand our price points and highlight our unique visuals and features we're introducing new collections for both the residential and commercial markets, our expanded premium pergo and Kerrest and collections have been well received at trade shows due to their leading visuals and styling.
The virus in China is postponing some production startups and it could potentially disruptive some LBC service, depending on when shipments resumed.
Sales of our waterproof laminate products are expanding across most channels and we anticipate continued market growth due to their realistic appearance durability and ease of installation.
The detailed visuals and performance features of our premium laminate collections are increasingly being used as alternatives for both would and LPT.
Just for a higher laminate sales, we are upgrading our HTS Ford production to increase capacity and reduce costs.
Our flooring rest of World segment continued to deliver strong results in the period. The segments business is less exposed to those European countries, which are having more economic difficulties across this segment our investments in product innovation cost improvements acquisitions, and new businesses strengthen our results.
We are outperforming the European laminate market with our focus on premium products that are more realistic with unique features sales of our new laminate collection are ramping up quickly due to an enhanced level of sophistication in the period, we absorb higher marketing cost to support this introduction.
We announced the consolidation of our would manufacturing to our facility in Malaysia, which will improve our cost and flexibility to better service our customers.
Our LPTA sales grew as our new manufacturing productivity significantly improve.
To further enhance our plant performance, we are implementing specific initiatives to improve throughput material cost and waste to utilize our growing capacity, we're introducing new rigid collections that are being well received in the retail DIY and commercial channels, we are expanding our LPT offering to our European distribution system.
To broaden our specialty store penetration.
Our sheet vinyl sales increased primarily from strong growth in Russia. The Russian plant is operating well and positively contributing to our results our European carpet tile business is expanding from a small base by increasing our sales organization and introducing higher value products to the market.
Our panels business continues to perform well as we introduce higher value products to improve our mix. We are increasing use of recycled wood to benefit our cost in and the environment. The expansion of our Glu plant is operating well and is contributing positively to our results were also installing a second waste to.
Energy plant to reduce our cost increase recycling.
This year, our installation business had good results with higher sales volume, even as declining material cost considerably lower than market prices.
In Australia, and New Zealand, we had good performance, we are launching many new carpet collections in multiple fiber to enhance our residential offerings are hard surface products had strong growth with LPT outperform new carpet tile collections are being.
Introduced to support our new commercial carpet tile line that is being constructed.
With that I'll return the call to you Jeff.
Thank you Chris.
Market conditions remain challenging across most of our businesses and geographies and response, we're adjusting our business strategies and enhancing our product offering and restructuring operation.
We're increasing our investments in sales and marketing expanding our commercial participation and enhancing both our premium and value collections.
We are bringing new product innovations and categories to the market that will broaden our distribution in the new channels and geographies.
Our new LPT countertop sheet vinyl in carpet tile plants are improving their productivity as we invest to expand our customer base and sales volumes.
Our Lv T. manufacturing capacity grows with higher speeds and efficiencies, we are enhancing designs and features and increasing sales of our rigid and flexible offerings.
Our limiting the traditional inventory build that we typically do on a first quarter as we manage our production with market demand.
Taking all this into account our EPS guidance for the first quarter of 2020 is a $1.90 $2, excluding any onetime charges.
LBC growth exchange rates and excess global capacity continue as headwinds for our business.
We are executing specific initiatives to DAP to shifting consumer preferences changing markets and competitive pressure.
For the full year of 20 point, we expect that our actions to increase sales and distribution reduce costs and enhance utilization of our new plants will deliver improved results year over year, what performance accelerating during the second half of the year, our balance sheet should continue improve with ongoing cash generation and we were.
Remained focused on delivering long term value to our shareholders.
We'll now be glad to take your questions.
Thank you ladies and gentlemen at this time, if you would like to ask a question. Please press Star then the number one on your keypad management request that you limit your questions to one primary and one follow up if you have additional questions you may reenter the queue again by pressing star one on your telephone keypad and our first question.
Today comes from the line of Philip Ng from Jefferies. Your line is open.
Good morning.
Your your comment on it will be teen Europe sounded pretty promising on the manufacturing front. Some just curious you, making money with that line, yet and with the success you're seeing on the manufacturing front out there are you still on track to breakeven in North America early 2020.
In Europe, we have.
Three line the two old ones are operating as we expect that are doing well. The third one is not at the level, we'd like it too, but it's improving and we expected to be profitable as we go through the year as well as a us line.
Welcome any more color in terms of the timing on the north Usnine terms of getting profitable.
It's going to happen during the year.
Okay.
And then just one last one from me on the cash flow Glenn you were kind enough to give us.
Free cash flow guidance last year any color on how we should think about 2020, some the big moving pieces, whether it's working capital Capex and then just given your balance sheet in really good shape and cash flow.
Still quite strong are you guys open to buy back more stock.
So let me speak to the first part of that and I'll, just say that we had a great cash flow year, and we expect cash flow to remain strong into next year and the ability to balance of improve our balance sheet is apparent.
What about on buybacks and buybacks, Jeff the buybacks, we have 125 million left will continue buying against it and we'll evaluate it when we use it up.
Alright, Thanks, a lot.
And our next question comes from the line of Michael Rehaut from JP Morgan Your line is open.
Morning.
Thanks, Good morning, everyone.
First question.
I appreciate the kind of directional guidance for the year in terms of your outlook for improved results with an acceleration in the back half.
I was curious as to.
What that assumes.
From a topline perspective.
You know.
Either by segment on a consolidated basis, but just trying to get a sense of how you're thinking about sales growth for the year.
And you know at all so there would be an acceleration in the back half there.
I appreciate you like more detailed information, but we give quarter guidance and we give you a direction, but we don't detail the rest of it and we're not going to do it now.
Alright.
I had to try I guess, but.
Appreciate that.
I guess secondly.
Youve increased or are you continue to.
Take action around some of the restructuring.
And yes. This is kind of an ongoing story as you continue to adjust to conditions.
I've heard about the consolidation of the carpet operations going back to the B. The first half of of 29 team.
Yes, I think initially.
Expectations were around some of those benefits coming through in the back half of 19.
And obviously as we shut those plants down.
I would presume that there's some amount of cost benefit.
On the onset so just trying to understand how those costs.
Our flowing through or at least the cost savings are flowing through you highlighted the fact that there is.
Things that are in inventory that continue to need to be worked through but at the same PON I would've thought that some of those cost benefits might have come.
Even in the in the back half of 29 team.
Well like we said, Mike really we finished the carpet restructuring largely in the back half of 2019.
And do the timing of implementation and the inventory flow through the costs, we're talking about a full run rate impact in the third quarter, yes, theres, a slow ramp up of the full full impact.
Thats meaningful will be closer to the start of the third quarter.
Okay, great. Thanks very much.
Our next question comes from the line of Mike Dahl from RBC capital markets. Your line is open.
Hi, Thanks for taking my questions on for all the detail so far.
The first question Glenn Thanks for outlining the LPT rebates I guess, just asking more specifically so I guess the 15 cents roughly.
In terms of benefits for the year, you said spread over three quarters.
How much is included in the first quarter.
The first quarter is the lion's share, but it's over three quarters.
The started garden as offsetting the inventory we have high inventories that you have with long supply chain and so the majority of its going to offset the price decreases that we've already implemented as the inventory flows through they match up it's in our guidance is spread over three quarters and like I said like just saying, it's largely offset.
Five by the inventory value on hand.
Okay. That's helpful and just the second question following up on that would be just given the given the price declines.
Following the exclusions.
You are saying its offsetting the rebates in the first few quarters, but on a go forward basis.
Since the rebates kind of go away the price declines I guess don't necessarily how should we think about the the net effect.
Beyond the initial quarter or to where you have the offset from the rebates I think the way we need victoza roughly offsetting.
Hey.
This.
Yes.
There's a large and since we raised inventory prior to the tariffs the inventory that most of the inventory we sold in the year with came from old pieces, and we still have large inventories with what we've been purchasing through the period as it and so its offsetting that.
Right I guess.
Sorry, just where what's going with that if market pricing has reset lower it are you, saying that is only impacting the legacy inventory or or is this a go forward impact from lower market pricing as well the market pricing has gone down on clickable Lv TV ad.
And I don't see new reason, it's going to change.
And the progress products were buying have gone down too so the new prices are inline with the.
New selling prices in costs are aligned so to the extent, we're buying it is pretty much offset.
Right right got it okay. Thank you.
Our next question comes from the line of jump out from Stifel. Your line is open.
John Thank you and good morning.
Quick questions. One you have a raw, yes on revenues sales basis.
What your market share on the USL bring to market.
Yes, but we haven't we don't give out specific details on product categories.
Okay, which you have a gas Jeff.
So when you see out into the future.
Reaching parity or any kind of rough idea.
Timeline.
I don't understand the question.
Well I presume your share of us LBC sales was lower.
Oh than your shares sort of.
Flooring market in general So my question is when would you see Mohawk.
In the LPT, whether it's important are made in the us sort of match up the shares carpets Ram Mike Laminate all put together.
It's continuing to increase but I don't have a date when the tool match up.
Okay.
Secondly, really quickly you mentioned imports.
Of ceramic from around the world in the U.S. down 17% in Q4 could you just remind us.
Sort of on normal typical year, how much importantly channel as a percentage of use consumptions. Thank you.
Imports as a huge part of this remic market, maybe 70, 75% so huge part.
Great. Thank you very much good luck.
John.
Our next question comes from the line of Justin skier from Selman Associates. Your line is open.
As I appreciate it just wanted to start just going to get a sense from you because the removal of the click LBC tariff was fairly recently, but I.
I think we all we understand the deflationary aspect of that in the near term, but how did that affect demand for LPT, what's your view for price and demand for the non LBG categories in the fourth quarter and what's expected in the first quarter and a high level.
There are no details of that available today.
Our expectation our guess is that LPT is has a approximately about a three and a half billion dollar part of the industry. It's growing we think that the growth rate is slowing as the base gets bigger.
As we go through.
It's impacting the growth rate of the other products within it.
As you go through so.
Im not sure we have the details that you are looking for.
Okay.
I was just keep our eye on that but I guess within your guidance.
As you unpack that there's there's obviously some conservatism around maybe production rate flowing and then the other the other element is the variable and SGN investment.
So as you know it was up about 9.5% in the fourth quarter up 7% for the full year Im just trying to get a sense for what you're SJ investment will be in 2020, recognizing that you have some cost tailwinds from restructuring efforts, but you're also investing in the business. So just trying to get a sense for how much SDMA will be up or down next year.
Well 2020 will be higher due to the full year impact of our investments.
We do expect higher sales in the second half.
And that's the target of these investments will evaluate as we go through the year and we will adjust as necessary depending on the sales.
Actually in the last question for me, just I didnt catch it but on the ceramic tile bridge, what was the price mix and what was the productivity and startup cost elements of the bridge.
Yes.
Yes repeat the question.
Oh the bridge the EBIT bridge that you gave I didn't hear price mix or the productivity elements of the ceramic tile and the ceramic style. So on ceramic up the price mix was slipped by four 4 million.
Down by $4 million price mix slipped by 4 million and overall productivity and lower startup costs offset that that was 6 million.
Perfect. Thank you guys comment on the EPS DNA in the US we're expanding the commercial sales forces were building markets for courts, countertops roofing and LPT and Europe, we're developing a new commercial sales organization to so LDP vineland carpet tile.
We've invested in regional distributors, which we purchased our our distribution and different pieces, which all the cost going to SGN, a was offset by higher sales and margins and Russia, we've talked about increasing store. So there's a lot of activities of which those are only some of it.
So these are these are growth investments and just ultimately you're so you're not pulling in the range, you're you're digging into invest to grow and ultimately you think that'll really manifest itself in growth better growth in the second half above market growth you think.
I mean, the mark to markets.
We are investing to expand the areas, which we think we can expand in.
We will monitor as we go through the year and we also have all the new product categories and knew the new businesses you have to put the sales people then before you get the sales for them and the marketing monies.
That makes sense.
Thank you.
And do the time constraints and to allow everyone to ask the question going further.
Please allow yourself one question. Our next question comes from the line of Matthew Bouley from Barclays. Your line is open and Matt.
Thank you for taking my questions or question.
Can you just provide a little more color on the comment you made around the.
The virus in China is impacting the startup a velveeta production and how thats flowing that you guys.
Yes, obviously, you're ramping your own capacity I guess the question is how rely into his Mohawk on the start up capacity in China for your 2020 plans. Thank you.
The information is less than perfect at this point the.
They go on holiday for the new year, then the people come back. So the people are not coming back at the rate. They would normally come back. There are some operations have started some are in partial things and have the has some haven't started at all.
And the question is how is all that going to line up and when that going to start nobody has a clear view of what it's going to be.
Given we have inventories in line, we can last a while before it has any impact on the business and we're having to moderate to see what's going to happen and our business. We do by product from other countries. We manufacture ourselves. So it has less impact on us than the rest of the industry with all end.
History has the potential of a slower slower service, depending upon what happens.
Great Thanks to the detail Jeff.
And our next question comes from the line of Susan Mcclary from Goldman Sachs. Your line is open.
There is.
Good morning.
If you could talk a little bit about how you're thinking of inflation and raw materials as we go through the year I know that you said it was $3 million benefit as it related to the consolidated business in the fourth quarter, but how are you thinking about that as we look to 2020.
The raw material prices in general, mostly the oil price oil related products have come down at the same time theres more aggressive pricing in the marketplace and we're assuming that the market prices.
Are going to continue to reflect.
The decreases.
Mostly in the commodity categories, and we're going to continue to.
Participate in aggressive manner.
We'll have to see how competition reacts and some of the other places we've had in Europe for instance, we had prices on our insulation boards come down dramatically, but so have the prices of the products and each so were assuming given the excess capacity is in a world today, the changes will be reflected in market.
Prices.
Okay. Thank you.
And our next question comes from the line of Seldon Clarke from Deutsche Bank. Your line is open.
Good morning.
Hey, Thanks for the question just given all the moving parts with your various product Rollouts and investments in Sta, and just how the timing of the in these investments related to your production ramp when should we expect to see some operating leverage shop on the CNS side.
And the second half, we're expecting to see some benefits from the actions, we're taking and we'll keep reevaluating them and depending upon how the markets change we will continue to adjust.
And our those those operating leverage are those.
Savings tied to operating leverage our purely cost that kind of 30 million you're targeting.
Move the 30 million of restructuring is more about costs.
You're tying the restructuring piece with the marketing investments they are separate.
Right. So I'm just trying to ask like when you should start to see some some operating leverage or on the SGN a side.
We're expecting to city.
Most more of the benefits of about in the third quarter in the second half, we keep saying.
Got it okay I appreciate the question. Thanks.
Our next question comes from the line Tim Lewis from Baird. Your line is open.
Hey, guys good morning.
Just a clarification just so especially in a is up and is expected to be up over the next few quarters as you're investing to grow sales, but but gross gross profit was actually up in Q4 for the first time and I think six or seven quarters. So should we expect that that gross profit can actually grow a little bit and you're reinvesting that.
Yes, you may now and that's really what's what's driving some of the year over year EBIT margin compression.
Is that the right way to look at it.
That's 41.
I think we stated broadly we expect a 2022 to improve over this year. Our overall results back end weighted to the second half and that's broad based it's based on our initiatives.
And the pass through of the cost so so SGN a.
It is a function of that and ultimately the trend should continue.
On the cost side, we're expecting the restructuring pieces, we've done to benefit at the same time to increased volume through the new plants should reduce the cost them to help the margins in those also.
Okay, Okay that sounds good and then and then just sneak another wondering what's the price cost inflation outlook in ceramic.
[noise] again, we've talked about that several times in ceramic and Thats really overseas that is largely up some raw material, but up but energy costs that are that are driven by.
The eastern European facilities, and fixed government pricing, yes, I think in Europe, we expect maybe a little of relief on some of the energy increases this year.
Okay. Thanks.
Our next question comes from the line Keith Hughes from Suntrust. Your line is open okay. Thanks questions on North America ceramic in light of the.
The following imports as you had identified as that.
I guess my question is what where does the channel inventories stand now what do you think that will be more balanced I know, it's been the out of over inventory for some time Keith we we don't know we don't have the data to see the inventory exactly what we know is that the imports which has a huge piece of the market came down 17%.
And in the quarter and the imports from China dropped off all altogether. So we expect it it's a combination of inventories in the channel coming down and softness in the market.
Is this still something that's going to affect the first off I would assume gross.
It's just hard to tell because of all we can really see is the amount of inventory coming in at to the country, but we don't have that essentially at exactly the size of inventory in the channel.
Understood. Thank you.
Yes.
Our next question comes from the line of Michael Wood from Nomura Instinet. Your line is open.
Good morning, Hi, good morning.
Just wanted to talk about that ceramics import data you know if I if I look at it historically it is down considerably fourth quarter year over year, although it's still higher than the fourth quarter in 17 and 16. So I'm just I'm curious how how you're looking at that.
Level of imports and how you're thinking where it should be I mean is this a level a healthy amount of import activity currently that we can sustain well what we believe is that as you got into 2019.
And when the tariffs were announced on the Chinese products prior to those going to affect there was we believe a significant increase in prebuys related to that in addition, as they replaced the Chinese inventory with other countries you added a combination of.
China. These inventories in the system plus new product that they were purchasing to replace it which elevated those inventories and sort of we believe gave a sort of thoughts view of how much the industry was growing we don't know exactly.
Last year, but we think it probably declined 3% to 5% would be about is just to guess.
Okay. Thank you.
Q.
Our next question comes from the line of Truman Patterson from Wells Fargo. Your line is open.
A German hi, Hi, good morning, guys and thanks for taking my question appreciate it.
The question for me the capacity that you all have coming online do you know previously earlier last year. You. You said you had about 1.2 billion coming online in 2019 and 2020 could you just give us an update of how much is coming online in 2020, and possibly 2021.
To remind us which products and categories.
And then just one item for for a clarification. The LDP rebate, if I'm hearing you correctly in the first quarter, it'll probably be somewhere around maybe a consumer benefit the Pos but we'll again, what we said is that's the total rebating, which will be largely offset or or abide by inventory.
And lower pricing. So so again, it's immaterial, but is in its in the guidance.
Okay, and then the capacity.
The new plants are they.
Our the different pieces, we have lv team, which is still ramping up it will ramp up all through this year, we have the Russian sheet vinyl plant, which is running.
It's positively positively helping the business now, but it's still as as only used about.
30% of the capacity as we push it into the marketplace, we have the carpet tile business, which we're developing a.
An entire.
Commercial sales organization, which is also going to sell vinyl and LPTA in Europe. So it's ramping up it takes a while to develop the customers and pieces, we put in new capacity in Brazil to put in higher end products and yet we have capacity in eastern Europe does make low.
In ceramic which expands our market there is is ramping up.
We have the courts plant in the United States, that's running about three shifts today.
But it's building inventory and also pushing it in over time, we'll go to four shifts in the productivity in inventories the productivity in throughput will go up.
And all of them, we have to get the mix on line because you start out selling more lower quality products to get more volume through the plants and it's going to take time to develop those as we go through so theyre all working through the system at different rates.
Okay. Thank you is that still about 1.2 billion that you're bringing online over the next couple of years.
I mean part of its already on so what's happening is some of the upside is getting offset by decreases in our legacy businesses. So the legacy businesses.
Our ASP declines and its offsetting some of the gains in our new pieces.
Okay. Okay. Thank you.
Thank you.
Our next question comes from the line of Kathryn Thompson from Thompson Research Group. Your line is open. Okay. This is actually Brian virus on for Katherine. Thanks for taking my question I wanted to ask a follow up on the current a virus and I guess the supply chain impact.
Sure GE industry contacts are telling us at the supply chain has not really had been meaningfully impacted but if the manufacturing stoppages or extended another three to four weeks that could that impact shipments about three to five months from now that you wanted to see if you guys think that logic makes sense and maybe any color on.
What you're hearing from manufacturers from either Vietnam or South Korea.
The impact to their supply chain.
I think that's close to what we said, we said that right now it's difficult to say how fast it's going to come up.
There are huge inventories in the chain over different times.
Matt.
It depends on each piece so typically there is anywhere from.
Four to seven months of inventory through the channels in the stuff coming through and in that you have some that out you know low at low parts and some that have high parts across the industry. So depending upon what it is and each piece and how fast the part comes up.
It depends on the time, there could be people in the channel with less than that and they could be impacted with a few weeks worth of delays the.
The non Chinese production.
And so surrounding countries.
Some of it or a significant part of it also uses inputs coming out of China. So if the inputs don't come up it could affect those also so at this point, it's really difficult to know what's going to happen and the impact in it depends on the inventory levels of any individual skews at this point.
As it most people when they buy from there there is the Chinese new year, where they shut down. So you have the product that was bought in anticipation of that still flowing across the water coming in.
And so it's still comes back to how fast it's going to pick up.
And you know what the timing of new production is going to production coming up and nobody has any idea.
Got it thanks for the call it.
Your next question comes from the line of John Lovallo from Bank of America. Your line is open.
Hey, guys I. Thank you for fitting me in here I, just want to make sure that I understand your outlook seems to imply year over year operating margin expansion to lease in Threeq and Fourq use is that correct.
Yes.
Thanks.
And our final question today comes from the line of Laura Champine from Loop capital. Your line is open.
Thanks for taking my question, if we look at your new production of Lv tea in the U.S.. How competitively do you think you'll be able to price that product relative to Chinese competition, and how does that influence your ability to get close to full capacity by the end of the year.
We think when it's fully optimized that we'll be able to compete with the world marketplaces.
At the same time, our goal is into so all commodity product. Our goal is to sell value added products I have a higher average mix, which will help which will allow us to meet the a return goals that we want.
Got it thank you.
I would now like to turn the call back over to Mr. Labar bomb for closing remarks.
And.
Well reacting to the market conditions, we see.
Excess capacity is in a market continuing and we'll have to continue to react to competition in the marketplaces as they evolve there are a lot of indicators that many of those markets around the world are expecting the economies to get better and improve.
We have a lot of.
A lot going on to increase the utilization of our new plans, which we think will help the second half as they as they had throughputs go up which will allow the cost to come down and also the mix to improve over time.
We think we're doing the right things react to the market and invest in the categories to increase our business level. During these times. We appreciate you taking your time and listening to us have a nice debt.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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