Q1 2020 Earnings Call
Ladies and gentlemen, just a few operator today's conference is scheduled to begin momentarily until that time your lunch what can be placed on musical. Thank you for your patience.
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[noise]. Good morning, My name is Carol one I'll be your conference operator today.
At this time I would like to welcome everyone to the Mohawk Industries' first quarter 2020 earnings conference call.
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As a reminder, ladies and gentlemen, this conference is being recorded today Tuesday May 15 2020.
Thank you.
I would now like to introduce Mr., Frank Boykin, Chief Financial Officer, Mr., but can you may begin your conference.
Thank you Karen.
Good morning, everyone and welcome to our first quarter Investor Conference call.
Okay, well update you on the company's first quarter results.
Like to remind everyone that our press release and statements that we make during this call may include forward looking statements as defined in the private Securities Litigation Reform Act of 1995, which are subject to various risks and uncertainties, including but not limited to those set forth in our press release and our periodic filings.
And with the Securities and Exchange Commission.
This call May include discussion of non-GAAP numbers for reconciliation at any non gap to GAAP amounts. Please refer to our form 8-K and press release in the best in the investors section of our website.
I'll now turn the call over to Jeff.
For his opening remarks, Jeff.
Thank you Frank.
For the first quarter, our sales were down 3.5% when a constant FX adjusted for one less day in the period.
The world change during the first quarter and we're now managing through an unprecedented situation.
Around the World government mandated stay at home practices are slowing the spread of the Corona virus, but a consequence being a seismic economic contraction that is challenging all businesses.
Mark entered the year as the world's leading foreign company with a strong presence in all categories manufacturing and I think countries themselves in more than 179.
During 2019, we generated 1.4 billion of operating cash flow have a strong balance sheet and leverage of 1.6 times near our historical low.
Well the outbreak our results for the quarter one line with our plan as we benefited from the initiatives we implemented in 2019.
Corona virus has dramatically changed or short term strategies as we adapt to the rapidly evolving conditions.
As we progressed through the first quarter government actions to reduce the spread of the virus impacted all of our markets.
Countries and stakes are reacting differently to the outbreak with some shutting or manufacturing operations.
And the most in most regions, we were able to produce and show product, but at reduced levels due to lower demand and employee come serms across all of our markets demand has dropped dramatically with residential remodeling being impacted the most up to this point.
We're allowed new residential construction and the commercial channel have held up better as projects are still being completed.
Do it yourself products are performing fast as some people started projects while staying at home.
The responded as global with that we've established corporate segment and business teams to manage our efforts as conditions change.
We're keeping employees site, increasing work from home and adjusting strategies as required.
It Doesnt capital expenditures cutting non critical expenses and put our stock purchases on hold until the environment improves.
Temporary layoffs furloughs are being implemented around the world as we balanced production with short term demand. The majority of our businesses can countries, where governments are supplementing wages to maintain workforce. However.
Some countries, our staffing our operation and requiring continuation of compensation.
Each week, we're just in production of processes to align with the changing levels of demand.
We are unable to predict how demand will evolve in the future.
Organizations is flexible and adapting to fluid conditions, we're applying the lessons we learned from 911 in the last recession the guidance through these times.
We recently obtained a 500 million dollar term loan to expand on liquidity. The 1.3 billion. After we pay off a 300 million dollar no Europe threat a million Euro note. This month.
No wonder maturities in 2020, we have liquidity to manage through and strengthen our position when the economy recovers and now we'll turn the call over to Frank.
Thank you Jeff.
Net sales for the quarter were 2 million $286 million down, 6% as reported but decreased 4% on a legacy in constant basis.
Sales growth in all segments slowed in March as a pandemic impacted our business.
Our gross margin was 27% as reported or 27.5% ex charges compared to 27.1% last year.
Favorable productivity of 38 million and lower inflation of $12 million were offset.
Declining volume of 31 million and lower price mix of 28 million.
Plant shutdown cost impacted results by $22 million.
As DNA as reported and excluding charges for the quarter.
$465 million for 20.3%.
Compared to 18.7% ex charges last year.
Slowing sales volume in March drove BSG in a percentage to higher than normal levels. This year.
Onetime charges were 12 million.
Primarily related to the actions importing North America to reduce carpet capacity and in rest of world to consolidate our would operations.
Operating income excluding charges was $163 million or 7.2% of sales compared to 8.5% last year.
Improving productivity of $36 million.
And lower inflation of 8 million.
Were offset by declining volume of $34 million and lower price mix of 28 million.
Plant shutdown cost impacted profits by $22 million.
To give you a better view of our business.
Sales across the enterprise in April we're all about 35% compared to last year due to the virus would shut down many of our customers and our operations.
Our rest of world sales were off more due to tighter European restrictions.
Our manufactured fixed cost range between 15% to 20%.
And asked DNA is about 70% fixed.
In the current environment, we're reducing some fixed cost and variable costs were not decline in proportion to sales as we need to maintain capabilities for recovery.
Given this in the second quarter, our decremental margins could range from 35% to 40% and we anticipate a loss in the quarter.
Other expense was $6 million.
The stronger U.S. dollar drove unfavorable transactional FX losses in the quarter.
The income tax rate improved to 20% compared to 23% last year.
Earnings per share excluding charges for the quarter.
Were $1.66 compared to $2.13 last year.
Turning to the segments.
In the global ceramic segment sales were $848 million down, 6% as reported or 2% on a constant basis.
Lower volume of $30 million.
Declining price mix of 6 million in FX headwinds of 13 million all impacted sales.
All regions were affected by the virus in the first quarter, but Russia perform better as they were not impacted until later in March.
Operating margin exchange ex charges was 5.8% versus 10% last year.
Lower volume of $12 million negative price mix of 10 million and inflation of 8 million offset $4 million or productivity.
Plant shutdown costs were 15 million.
In the flooring North American segment sales were 848 million.
Down, 8% as reported or 7% on a constant basis, lower volume of 57 million and declining price mix of $16 million.
Both negatively impacted sales for the quarter.
Oh, BT and sheet vinyl outperformed other product categories.
Operating margin excluding charges was 4.9% an increase of 150 basis points compared to last years, 3.4% margin.
Improving productivity of $29 million and 7 million of lower inflation offset plant shutdown cost of 6 million and negative volume of 19 million.
In the flooring rest of World segment.
Sales were $589 million down 5.3% as reported.
Or 1% on a constant legacy basis.
Higher volume of 4 million was offset by $16 million of lower price mix.
Our operating margin excluding charges in the segment.
Was 13.8%, that's down 150 basis points compared to 15.3% last year.
Productivity of 3 million and lower inflation of 8 million were offset by $3 million, a declining volume and 13 million of negative price mix.
Shutdown cost of 2 million.
And then another 7 million of increased selling and marketing initiatives, which impacted our results.
And then in the corporate eliminations segment, the operating loss, excluding charges was $8 million.
We estimate 35 million for the full year.
Jumping to the balance sheet.
Receivables ended the quarter at a billion 645.
Our Dsos were 57 days into first quarter and that compares to 56 days last year.
Inventories ended the quarter at 2.195 billion declining about 143 million or 6% compared to last year.
Our days improved to 130 days compared to 834 days in the fourth quarter.
We expect to continue to reduce inventory and improve days through the end of the year.
Fixed assets ended the quarter at 4 billion for 73.
Included in that was capital expenditures for the quarter of 116 million and depreciation and amortization of 146 million.
We are estimating capex for the full year 2020 to range from $360 million to $390 million with depreciation and amortization estimated at 580 million.
Going to long term debt at the end of the quarter, our debt to EBITDA ratio was a little above 1.6 times and EBITDA to interest coverage was 32 times for the trailing 12 months.
Our free cash flow during the quarter was $80 million with total debt of 2.7 billion at the ended the quarter.
Since then.
We have issued a 500 million dollar term loans.
And we'll pay a 300 million euro notes.
This month, which will leave 1.3 billion a pro forma available liquidity.
We have a strong balance sheet in our triple B plus rating remains unchanged even in this environment.
During the first quarter, we purchased $69 million or 579000 shares.
And will not make further purchases under our stock buyback program until our visibility improves.
At this time I'll turn it back over to Chris Chris.
Thank you Frank.
We're currently operating in a variety of different environments based on government regulations impacting our customers manufacturing facilities and workforce.
These are taking distinct approaches to manage the spread of the virus and our businesses are executing different strategies to with that.
Even where mandated manufacturing shut downs have occurred we're shipping product from inventory to our customers that are operating in.
In April our business declined sharply further requiring weekly adjustments to adapt to the rapidly changing environment.
Our markets ranged from having some retail outlets and construction sites being operational.
Those were all retail and construction had been close.
We are restricting our expenses and investments what is essential to run the business, we're reducing its DNA marketing and IP investments.
We're lowering capital spending and non critical engineering, R&D and maintenance project.
We are enhancing daily and weekly reports to manage our financial categories, including inventory levels headcount receivables and payables.
We're lowering our cost by implementing layoffs and furloughs using government assistance, where available in some countries. We're obligated to continue thing the existing workforce, even when our plants are shut down.
We are benefiting from lower raw material on energy costs no other headwinds are considerably greater.
Each of our segments in individual businesses had strong leaders that have managed through difficult circumstances multiple times in the career our entire global teams is taking extraordinary steps to support our customers and protect our business.
We have an exceptional team of people at all levels of the business and I'm proud of how they about keeping one another say with meeting the needs of our customers.
For the period, our global ceramic segment sales were 848 million a decline of almost 6% from last year or 2% on a constant days and currency basis.
Each of the segments reasons was affected by the virus at different points in the period with Italy at the forefront.
In each region, we're lowering our production with demand, reducing our cost structure and adapting to different government programs in each country.
Are you ask ceramic business has a higher percentage of new residential and commercial sales. So demand has declined more slowly as those projects are still being completed through February ceramic imports were 18% lower than the prior year with average import pricing, 5% and shipments from China had virtually stock.
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We are reducing production in the second quarter to lower our manufactured product inventories.
We've added virtual online product selection and curbside pickup and our service centers to meet social distancing required.
A quick tell production continues to ramp up as we began introducing new collections into different channels, we're increasing our higher value courts countertops as our productivity and cost continued to improve.
You had sales of the large porcelain slabs, we produce in Italy are growing significantly from a small base as consumer awareness and distribution expand.
Do it yourself products, you're selling better than professionally installed lines due to social distancing concerns.
In Pennsylvania, our small specialty tile plan has been shut down as part of the state mandated closure of operations.
In Mexico, our first quarter sales were slightly better than last year with our mix declining due to increased competition higher inflation and transportation costs and investments to expand the commercial distribution.
After the government close not essential businesses, our plants were shut down throughout April and we continued to ship product inventory to meet customer demand.
In Brazil, our results in the quarter were good even though the virus negatively impacted the ended the period sales were strongest in new construction and export channels [noise].
During April Sao Paulo, and other regions suspended most commerce significantly impacting ourselves.
We are lowering production in the second quarter to reduce inventory with declining demand.
Our European ceramic business was performing well until the krona virus stop traveling Italy, and the government shut down or manufacturing. This was followed by mandatory shut downs in Spain, and a lock down of the French market as well as other closures in Europe.
We've been able to continue shipments to customers. So demand has progressively decreased.
And the lack of transportation has NPD some shipments.
Our product availability has deteriorated with many of our plants not operating.
We are postponing product introductions and reducing our SK use.
During the second quarter, we're planning to operate factories below our sales levels to reduce inventories and we're using government support to reduce headcount.
We are monitoring customer orders and receivables as we enter may most European countries are developing plans to gradually reduce logged out of their economies and we have restarted our Italian production.
Our Russian business, our volume in the first quarter was stronger than expected due to customers anticipating higher cost inflation from a declining ruble and increasing their inventory levels in the first quarter. We ended up production lines, we expand sales of our large sized porcelain tiles and slabs. We also started up.
Premium sanitary Ware plan to offer coordinated products through our owned and franchised stores.
Although the front of buyers did not impact Russia until late March much of the country is now locked down with many stores in construction sites presently close.
In April we reduce production oil just further as required.
For the first quarter, our flooring North Americas segment sales were 848 million a decline of 8% from last year were approximately 5.5% with one less day and the exit of unprofitable wood and other products.
We began the quarter, making progress on the initiatives launched during 2019 in March our priority shifted to managing a chronic virus outbreak protecting our employees and supporting our customers.
Across the business, we're reducing production and implementing layoffs and furloughs two aligned with the abrupt decline in demand.
The segment has a higher percentage of sales from a modeling and a large number of our retailers are not operating those that remain open are putting much lower traffic and sales.
Many retailers they carry our rug collections have also been close dramatically impacting our sales.
To meet the growing need for health care supplies are rug team is producing medical gallons and they shields for hospitals and first responders.
During the quarter, our residential carpet sales performed best in the builder and multifamily category as projects underway have continued.
We brought new carpet collections to the market earlier than ever in the first quarter, which created greater sales opportunities before the buyers.
To purchase carpet consumers must go through in home planning measurements and installation by specialist which is this advantage in carpet sales in commercial the education and government sectors were the strongest performers in a challenging marketplace, we're adapting to architects and designers.
Working from home through new resources, such as visual interactive studio, which allows them to see our products in their plans spaces.
During the quarter, well be t. and cheap vinyl products performed the best in this segment our L. B T operations have improved with higher daily output and increased uptime.
New styles and features are being introduced to utilize the increasing production of both rigid and flexible products.
Knowledge transfer between our LBC plants has slowed as a result at the European travel ban.
The ruble of U.S. cares from Chinese quick Dalbeattie lowered market prices for those products.
Improve our margins and mix, we've introduced collection, featuring enhance design and performance under our premium brands.
The Corona buyers in China created limited.
Corruptions for our source products.
In the current climate cheap vinyl is becoming more appealing it with price point and ease of installation for D. I weighed project and multifamily renovations.
Like resilient flooring laminate also provides an easy DIY alternative our stated the art laminate provides realistic visuals waterfront technology and enhance durability and our wood flooring business, we have restructured our manufacturing operations, which has increased our productivity yields and margins.
During the quarter, our flooring rest of World segment outperformed our other businesses. The segment sales were 589 million a decrease of 5% from last year or flat on a constant days and currency basis.
Severity of the virus and the nature of the government response has deferred from country to country. Some countries had mandated the closure of manufacturing facilities.
Others have shut down retail and construction and then others personnel are not comfortable come to work.
Given this environment some of our manufacturing operations have completely shut down while others are stopping and starting to align with regulations and reduced demand across our product categories. We have continued shipping from inventory to support our customers that are operating.
In many parts of Europe. The Cobot 19 outbreak appears to be speaking as hospitalizations trend down in many countries lot downs are being relax with more shorts operating and social distancing. Most anticipate that this trend will extend the more countries over the coming weeks.
Even as helped situation improves and most stores reopened we anticipate significantly lower sales and production in the second quarter.
The product care categories in which we have made recent investments, including rigid LBC sheet vinyl and carpet tile delivered growth in a difficult environment.
BT outperform as it takes market share from other product categories are rigid LPT production continues to progress well and our cost reduction program is on track as outfit increases.
New products and faster service levels are enhancing our value to customers with improved capital use and turns customers that import LBC from China are increasingly interested in local supply.
Due to close retail stores, we are postponing the introduction of our next generation LPT until the fall.
In the first quarter, our sheet vinyl business delivered good growth due to exports outside the region and higher volumes in Russia, we benefited from lower raw material cost.
Lower production rates in Europe impacted our margins are new Russian plant is performing well and we planned are as we expand our product offering and customer base.
Our carpet tile volume continues to grow from a limited base from investment sales and distribution in both retail and commercial.
Our laminate business continues to deliver strong margins as result of new premium products and higher branded sales results in the first quarter were impacted by higher marketing and selling costs related to the launch a new collections and declining volumes, primarily in countries where retailers restricted.
We are expanding our digital sales as consumers shop online for DIY projects, while staying at home.
As with our other product categories, we are postponing new introductions until the end of the year.
Our Russian laminate business held up better throughout the quarter, although parts of the country are presently being locked down our Malaysian wood plant is presently operating at lower levels due to cover met restriction. We completed the closure of our wood flooring plant in Czech Republic, which is reducing our costs.
Our installation plants in France in Ireland were not operating in April and there are other plants are reducing production and for a long employees.
Our board operations are being impacted similarly to the rest of the business and we are starting and stopping production with temporary layoffs.
Higher sales, especially products and lower raw material prices supported our margins during the period.
We benefit from a low cost position due to the investments we've made over the past five years in quarter, two our new plant that converts bio waste to energy will commence operations and we will sell the exists energy to the brand.
In Australia, New Zealand, our sales were up slightly with hard surfaces growing lower carpet sales are pressuring margins a major update to many of our product lines is being well accepted our first quarter results were negatively impacted by sharp falling local currencies compared to the U.S. dollar.
In late March Zealand's government enacted a stringent locked down shutting or operations and retail outlets throughout April whereas in Australia, we've seen no locked down on manufacturing so far.
I'll return the call to Jack.
Thanks, Chris.
As we enter made the Corona virus has dramatically disrupting the economies around the world.
Some countries are beginning to explore using restrictions while others are extending them.
Presently all of our plants around the world or an operation, except those in Mexico, and a small plant in Pennsylvania.
We're focused on conserving cash adjusting production, reducing inventory preserving operational capabilities, we're also reducing expenses and investments and aligning with the government requirements and support.
The rate at which governments will open commerce and the subsequent to consumer spots cannot be the term some businesses have postponed investment both remodeling and new construction until a recovery becomes more apparent at the end of April most people's sheltering in place right across the world.
Let them our sales are about 35% below the prior year and we cannot predict the rate at which it will recover give any circumstances were unable to provide EPS guidance for the second quarter and anticipate a loss in the period due to the cope at 19.
Our balance sheet is strong with substantial liquidity of 1.3 billion to manage through the crisis. Our business model remains solid with strong local teams in each market, taking the necessary actions to manage the downturn. The economies will return to normal overtime and we are optimistic about the long term future of our business.
With that we'll be glad to take questions.
Ladies and gentlemen at this time, if you would like to ask your question. Please press Star then the number one on your telephone keypad.
Management request speed limit yourself to one question and I'll follow up question.
My first question comes from Keith Hughes from Suntrust. Please go ahead.
Thank you.
A couple of questions I guess first on the closed retail stores that clearly played a role and what's happening here in April.
Are you getting a sense that.
Those are now starting to open up in May is that more states and not a business. This allowed to open.
I was at some of these restrictions are being lifted.
It's too early for us to have details of it now we're just watching the news around the country from different states and we're assuming that there will start opening up the question as one of the consumer is going to do.
Okay, and I guess second question.
More of your again basically back to the back the U.S. you talked about LTT.
Still growing gaining market shares with Dolby TD, Ed Wood, Chipping you're going to fills in April been up for you or is it just pressure just less pressure than the rest of the products.
The L B T cells in the period.
Continued to expand and the first quarter, but they slow as we entered March.
The.
So the overall business is slowing and we're gonna have to see where it ends up LDC because of the growth that was happening started from a higher point.
And we'll have to see how it progressed as as we go through.
Okay. I guess final question on raw materials is that going to be a growing tailwind for you over the next quarter too.
There's parts of business, the raw materials or energy and materials have declined across the categories, but were offset by volume price and mix with our sales declining the lower material costs will take longer to flow through to costs.
And then just as a point our recycling materials are declining less than the Virgin alternative.
Okay. Thank you.
Our next question comes from Stephen Kim from Evercore ISI. Please go ahead.
Thanks, very much guys and thanks for the color Frank welcome back.
I wanted to ask you a little bit about the productivity and the decremental commentary you made Frank So when we were pleased to see the strong productivity number in flooring North America was curious if that was tied to the restructuring initiatives you did in that business and therefore, we might be able to expect that portion at least.
We continue.
And then your overall shut down to 22 million in one Q, we're thinking that's going to go up obviously in twoq, but even if we doubled it seems to only get me to the low end of your detrimental range. So wondering if maybe it's reasonable to think that that overall shutdown number is gonna be more than double what it wasn't one Q.
As we look into Twoq.
Well first just to.
Yeah, maybe put some bounce fence around the discussion about decremental margins you know, we're taking historical fixed and variable cost and then they are assumptions about how sales are going to behave in about what we take out and costs that are driving that.
I will say that to the extent that we take.
As our production capacity goes down or our run rates go down that is going to have a larger impact in our shutdown cost I'm not sure. If I'm answering your question, there Steven or not but shutdown costs will be going up for sure.
Then the productivity pieces. We did will continue the problem is that the plants will be operating at much lower levels and the offsetting negatives in the unabsorbed overhead and pieces are going to be high.
Yeah that makes sense.
Just to clarify that productivity number 29 million and for North America. Frank does that include any sort of suboptimal operating levels or is that sort of a standalone number and that the and the reduction in operating level does in those volume number that you get.
You will have less productivity as your volumes go down we'll have more productivity as your volumes go up it will drive it up and down okay.
Okay got it yet adjusting for everything and then longer term strategic question I know you've been taking downtime in your ceramic plant for for a while now and I know you previously indicated you're evaluating the potential to maybe make things a little more permanent there was curious if you could tell us how you're thinking to evolve there obviously lots changed but if you could give us a sense for your thinking.
About the level, how you assess what the proper level of capacity is and in the ceramic business.
So Steven we are of course, managing to the short term volume decrease and at the same time trying to get a read on the long term demand and as soon as we can get to read on that will adapt our capacity to fit in.
Thank you.
Our next question comes from Kathryn Thompson from Thompson Research Group. Please go ahead.
Hi, Good morning is actually Brian buyout options Katherine Thanks for taking my questions.
I wanted to add starting on the supply chain.
Last quarter, you guys gave us an update on the supply chain and Pat added China and Asia.
I guess, given where we are today can you provide an update on the global supply chain today.
From Asia, and also just gear up and you guys markets.
We've heard that Chinese production.
Typically an l. the T was approaching previous run rate through the end of March and just wonder if you would consider hearing.
That same thing the up.
What normally happens is there's a vacation period and the first for the year. So when you build up inventories going into that.
Production didn't start up when everybody had anticipated in a sense gotten up to close to where it was before but now you have declining.
ER.
Business trends in the United States and so with that it's also difficult to understand what the present level of the industry, yes, because you're seeing the imports come in based on purchases from months ago, and you really don't have site or what the president.
Sales are in consumption.
Got it management.
And then a follow on on the Capex.
I guess, you're talking about more provide more details I know in the prepared remarks, you mentioned the number and I think it was.
It's lower than the original plan, but that it was around four 540 million.
And I think previously you guys have matching maintenance Capex is 200 million.
So you can you got to talk about the different there what you've been able to put off and kind of what is being sacrifice in the short term for pushing off that capex.
Well a major part of what you see into 363 90.
Represents projects that.
We're already committed some of which have already started so we're not able to.
To stop those we are continuing forward with important cost savings and innovation projects as well as safety in maintenance and this is the maintenance numbers going to be down much slower than the number that you just you decided.
Got it thank you.
You're welcome.
Our next question comes from Eric Bosshard from Cleveland Research. Please go ahead.
Good morning.
The question then a follow up.
Thanks for the insight and the detail on the margin for two Q.
Think about the back half of the year should the decremental an incremental margin continue in this.
30, 40, 30 by 40% range or should we expect to behave differently than that.
You know.
The difficulty with that is like we said a couple of times on the call already.
Is the lack of visibility and not knowing how sales are going to trend.
And how we're going to respond with cost takeout permanent versus temporary all are going to impact you know what our decremental margins are so Eric I don't I don't think we're prepared to give you.
An answer that you'd like to have on that question right. Now you also have another thing with governments, helping different amounts most of them are temporary and how they're going to change and evolve depending on their economies. We also don't know.
Okay.
And then second question in terms of the North American Telemarketing your.
The data on the import volume and price.
Sounds positive from a competitive standpoint.
I'm curious in your North American tile business the performance call it year to date.
And as you look through the year and I know you don't have perfect visibility.
In terms of.
The market growth your market share in the price mix, how do you feel or what are you seeing in terms of where that's going especially considering the change and.
The competitive dynamic is that import data shows.
Yeah, what what I would say is that the U.S. ceramic business has been impacted less due to a higher percentage of new residential and commercial projects.
The commercial the ceramic imports continue to decline and we've reduced production to lower I manufactured inventory.
The quick top production is ramping up and we're expanding our higher courts countertops.
Okay, and then just one follow up with that being shielded from some of these pressures from the new resin commercial is that continue or when you complete these projects is there a.
Kind of an air pocket on the other side about what is the proper expectation.
Well, we really don't know, but I think what you could have some balance in some states we've been shut down which I think we'll open up.
I think there could be an expectation that as the new home starts have declined that you could have a gap in the future. So one could possibly offset the other.
Okay.
Thank you.
Your next question comes from Michael Rehaut from JP Morgan. Please go ahead.
Hi, Good morning, everyone. Thanks for taking my question Hope, everyone said safe and healthy out there.
Yeah first question I appreciate the you know the comments around you know to Q sale.
Believe you had mentioned that rest of world, maybe down a little bit worse than that 35%.
I was hoping I know you don't like you get too granular segment by segment, but just given the.
You know extreme volatility here.
You know if you could provide any kind of degree of magnitude in terms of as you look across.
Ceramic flooring North America in rest of World.
How you're thinking about it.
The declines relative to that 35% that the rest of world maybe is more like 40, 45%.
In ceramic in flooring, North America, maybe closer to 25 30.
Any type of directional degree magnitude there would be helpful.
I can first just talk about say flooring rest of world in the.
First quarter.
Flooring rest of world outperformed the other segments the impact of the Corona buyers deferred by country with more severe locked down in the U.S.
As we got into April Europe had and the breadth decline in was more severe the virus started earlier on the lock down was more restrictive construction and commercial impact in more than in the U.S. in April many customers were not open in some projects were stopped.
But most countries are opening up to increase commerce.
That's rest of world.
The rest of world off significantly more due to the locked down that it snap on.
And the other businesses are similar.
So.
No.
Numbers don't mean anything because I can tell you. The next week's orders don't look like last week's yeah. We're just looking at four or five weeks of data here in a very volatile environment. So it's hard to draw a really good our conclusions.
Right right I guess I guess, maybe that part of my second question really is.
You know across.
There have been some initial comments by companies.
Around.
Trends, improving actually even over the last six week.
Some of the homebuilders have reported you know.
Stronger or.
Less than they can decline.
A border trends over the last two or three week.
Yes, some building products companies have also summit.
Pointed to slowing orders others appointed to maybe a little bit of improvement.
As the month has progressed.
As you kind of zeroing in on the U.S.
Can you give us any commentary around how you're seeing the trends unfold throughout the month, if there's any [laughter] third double patterns in terms of.
You know what you're seeing across you know carpet ceramic and into the other product lines.
I can't tell you that there is such that the.
Changes or you can really see a trend than anything because you have different customers in orders going up and down at different points across it one thing to remember.
In the past cycles Laurens declined more than other durable products in general and its decline for a couple of reasons. One is it has a higher ticket price and some other categories second is it's got a lower.
More amount sold through duly iwai, which is doing better at this point.
And finally.
Other product categories.
I have to be replaced them now worn out our products you can live with almost forever, so when that when the customers.
I'm comfortable that Keith postponing the stuff for a while so it it's causing a more higher impact was a piece.
The other thing I guess is that given the opening of the retail store should help.
Going forward, we see almost every country, where in starting to relax the restrictions now what impact is going to have we can't even guessing at this point.
Yep.
So I mean, it's really hard to predict how the future of evolve which is why we can't give any guidance I mean, it could be substantially better could be the same or can be worse, we have no idea.
Right now I understand I guess, one last quick one just a clarification can you talk about Twoq you are expecting an operating loss.
Just to clarify that would be on a we're talking about on EBIT basis, Yes, EBIT EBIT falls.
Great. Thank you.
Your next question comes from John bought from Stifel. Please go ahead.
Thank you good morning and.
Well swishes in this difficult period, a I wanted to jump into the price mix issue and you are you seeing anything around all the areas you operate where there is like for like pricing pressure or are you seeing sort of the typical mix trade down his primary issued.
There was a lot out there were some.
Both pricing and mix were under pressure from first quarter.
We had a $30 million decrease in price and mix in the first quarter as the markets got more turmoil as you would suspect there's not a lot of pricing movements because nobody is up.
Yes, so we're gonna have to see how and evolves as yet.
Who knows.
And then just as a follow up on [noise].
You mentioned, there could be a little bit of an air pocket with home starts.
A weakening in the subsequent flooring demand following what would the same potentially happen in the commercial area, where you're working through decent backlog split.
What's the outlook for commercial a couple of months solved.
Same thing you have projects it go one.
On a new housing we tend to be at the end of it which means you know the ones that given the small ones tend to get built in six months and large ones called a year or more is it. So we tend to be at the end. So we get it there on the other side if they stop either commercial projects, starting or planning all of them the pipelines get.
Pushed out now offsetting that you have the residential retail business, which has basically been close to stopped in many places it's going to just opening up the doors. We have to do more is it even if hardly anybody shows up so you have all things going on.
There's no way to anticipate how they're going to balance out or the timing of either.
Yeah, Okay. Thank you Jeff good luck.
Your next question comes from Mike Stone from RBC capital markets. Please go ahead.
Hi, Thanks.
Jeff just as a follow up to a your last comment is just given some of these dynamics from a customer channels standpoint is there any way you can break down.
Within the U.S.
You know your April sales performance by by Channel.
Just to give us some some sense of how much of an impact those retail shutdowns of pet.
I don't habit to give you the residential remodeling is the one that was hurt the most as you a suspect there was also some inventory changes from the channels it inventory.
Basically typically the inventory goes up in the first quarter for the seasonal improvement that you expect so some inventories were built a little bit in the first quarter, which have to get drain people started cutting inventories out of the system and then.
On the commercial side you have to same thing that projects were interrupted even ones are going to go a headwind we started delivering samples to designers homes and give the idea is what's going on.
You know, how it's going to change is really.
The problem. We're having is we cannot anticipate how all the different purchasers are going to change in the near term and how it's going to affect the business and again, we don't know, if it's going to get dramatically better or or worse.
Got it Okay. My second question I think I would add to that Mike is residential remodel tends to run much more much higher as a percentage of the total pie of in other categories.
Right Okay.
Okay follow up question just given the.
Some of the pain being felt on on the specialty retail channel, particularly mom and Pops and probably some uncertainty over whether some can even open the doors backup.
You know period can you talk about what you're seeing in real time on your receivables. What are what are you expecting there and anything with respect to a bad debt expense.
You could talk to.
Yeah, I'll address that I mean are you heard to our receivables dsos or the ended the quarter right in line.
Pretty much with where we were a year ago.
And maybe just a as a note if you compare our bad debt expense in the O. eight Hunan recession. It was running about four tenths of a percent and that compares to two tenths of a percent into first quarter of this year.
So we didnt see much movement HM into last downturn and I'd also remind you that we really don't have any large significant customers, we have a pretty diverse widespread customer base.
Okay. Thanks, Brett.
Your next question comes from Susan Mcclary from Goldman Sachs. Please go ahead.
Thank you. My first question is just going back to the raw material discussion can you outline for us what your exposure is to petroleum based products today, and especially maybe given the shift in the business that we've seen relative to the last downturn.
Relative to the less downtime.
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Carpet business has the largest.
Or the carpet and the vinyl business has the largest portion of oil based materials for final really comes from assets was really the carpet industry has the biggest portion.
Oil based materials on the other side ceramic has a large use of natural gas.
And yet.
And then you go through all the different other product categories, they have different raw material streams.
Right, but if we think about you know how carpet has shrunk relative to where it was say you know 10 years ago 15 years ago, what has that met fear raw material exposure and how should we think about that that difference coming through in result.
There will be less exposure. The other thing that's going to happen in a short term and given the dramatic decrease in a short period of time, even though the prices have gone down you know, we're buying significantly less reducing our inventories on one side and also buying less.
Yes relative to the volume are producing so both of those are gonna have a.
A a impact on reducing the the positive impact it would have as we're buying and running at the same rights we always run.
Okay.
Can you talk one more piece to enter into our polyester is manufactured from recycle Bob and the recycling bogs are not moving down and proportion with the.
Yes priced oil prices.
Right. Okay. So there won't be as much of the benefit there.
Right.
Okay. Thank you also just talk a little bit to the progress that you are making with your L. B T plant in the U.S., how is that coming together and has there been any change given what's obviously then going on over the last two months or so.
Yeah, the Lv too.
Has improved.
During the period it continues to get higher throughput rates and a more productivity in the place and less downtime on a daily basis.
Our sales in a period continue to go up but they slowed or the amount that we were increasing.
The transfer of knowledge from Europe to U.S. slowed because normally we would have engineers over here when they banned the travel the engineers didn't but we're still making progress we've identified some mechanical improvements that we're going in the third quarter and the second half.
That will step change the ER speeds that we're running at as well as impact the material cost further, but we continue to make progress on both the European side any U.S.
Okay. Thank you.
Our next question comes from Laura Champine from Loop capital. Please go ahead.
Thanks for taking my question Firstly, just for historical context When's. The last time Mohawk has generated an operating loss and then more relevant going forward bad certainly appreciate all your comments about demand uncertainties, but when you plan your production.
And how quickly could you or do you plan to get your production volumes back to flat year on year.
I think the last time, we had a loss was when oil prices went to $140 in 2008 or nine.
And we couldn't raise the price is soon enough. So we flipped the flow through caused a loss in one of the period.
I don't exactly remember that day.
First quarter 2009 first quarter 2009, and then I've got the second part of your question.
The second part was when you're planning your production to be back to flat year on year in terms of volumes.
Well right now we're reacting to the incoming business on a week to week basis, depending upon the the equipment, if there's a really high cost them operate a.
Starting and stopping.
Operated for a period of wheat and shut down for a period on other ones were starting and stopping on a weekly basis and the times, we're running a really related to the incoming business model and.
We build inventories and shut down to get it back in line.
Got it thank you.
Your next question comes from Justins here with Zelman Your line is open.
Thank you first question is or is there a volume or revenue decline threshold, where you think you'd potentially break even in the second quarter.
I guess or are you assuming the volumes are going to be down consistent with a 35% decline you saw in April for the balance of the quarter or do you did your view your profit view in particular suggested.
Any improvement at activity with a restrictions real being relax.
Well, we're assuming it's still going to be difficult for the quarter, but we don't have any evidence to base. It on if the volumes out of high enough, we would make money.
Were breakeven.
Okay.
So in terms of the rough productivity I don't know if you can give it break it out for me, but the rough productivity in the rough production shut down dollar shutdown costs in global ceramic if you can give break that out for us what I'm guessing you're planning for for the second quarter you <unk> you pretty much no based on your volume assumptions what are you thinking the pro.
Activity drag will be for ceramic and for the rest of the business.
Adjusted like we said a couple of times already we were not really.
We've got very limited visibility right now and so we are not.
Really getting into.
Forecasting anything for the second quarter, including productivity.
And volumes could you ended the quarter.
We have multiple scenarios high medium and low and we don't switch one is going to work [laughter] I get it I know, it's it's very difficult.
Positively the 29 million dollar productivity lift in flooring North America very very strong.
I know you had previously announced some pretty previously announced Tailwinds from facility closures I thought that was going to be about Oh, my God annualized number.
Consistent with what you just did in the first quarter. So maybe help us understand what went into that productivity.
Improvement and how we should think about productivity on an annualized basis in a more normalized volume scenario.
In flooring North America.
Well I think I mentioned with another caller earlier, one of the drivers for productivity is.
Develop these.
Grams cost savings initiatives and one of the drivers is how much volume we put through.
And so wanted to keep answering the questions the same way, but sparsely maybe depending on how volume forms through the rest of Europe.
And then in our productivity the shutdowns all the pieces all the shutdowns the more startups and and so.
Startups and shutting down to make the time you make all goes into productivity.
Part of the same number.
Right right, but you you put up a 29 million dollar number with almost a high maybe a high single low double digit volume decline in the first quarter and I know there was filled the closures that probably went into it but it was it also there will be t. plant that that helped drive that or is there something else that that led to such a eye popping improvement.
It will be two was one of the pieces and it did have significant improvement in a period.
Thank you guys.
Your next question comes from Truman Patterson with Wells Fargo. Your line is open.
Hi, good morning, since Trevor Elton on for Truman. Thank you for taking my question.
In recent quarters, you guys said increased you're selling in market marketing efforts thoughts to helping sell some the additional capacity that you were going to be bringing online I'm just thinking about your ability to take out SGN a cost also balancing your ability to sell those products once demand rebounds, how are you guys, making it.
Out.
Those actions on the S.J. side.
You're correct, we have been investing in sales to expand the business.
U.S.T. and $8 in the first quarter were basically in line with last year and dollar amounts, but the <unk> percent increase because the volumes decreased.
The virus has interrupted the business and we're taking steps to align the cost of sales and marketing where the present conditions were already reducing sets a marketing expenses administrative costs and we'll adjust the total cost structure once we get a more permanent basis.
Once we get a view of where the business is going to be going forward at this point no.
Are there to see or an l. or somewhere between the two every week, we learn a little more and.
Currently we are making more temporary changes than permanently.
Okay. All right. Thank you and then on not flooring North America sales decline tend to be pretty much in line with last quarter on a year over year basis in a pretty healthy housing markets, hoping just discuss little bit more about what's driving the topline weakness there maybe you could.
Okay. It out whether its oh VT, taking market share other factors.
I will be key is continuing to take share from the others the carpet sales.
The industry decline in the mid single digits in the first period.
Is.
There's inventory adjustments going on in some channels and some channels they stopped doing even though the stores were opened.
In some channels they stopped doing measurements and and installation in the period. So I mean, though businesses is turned upside down.
Hoping that many of these things will get better going forward, but we're not sure if it's going to happen tomorrow or how long it's kind of tech.
Okay. Thank you goodbye.
Your next question comes from my quick with Nomura Instinet. Your line is open.
Hi, welcome back Frank.
Oh.
First a big picture question for Jeff Yeah, most clearly suffering here with your expectation lose money into Q, but you guys have always and you're likely going to continue to outperform the industry in terms of profitability.
And so knowing that even you know many of your competitors struggled before cobot 19, what are your thoughts and how quickly how many of your competitors me may actually see some business closures.
You know permanent business closures and what are you doing to gain share.
And as you said in different markets in different countries and different product categories. There. Our players that were struggling before when their liquidity and their ability to sustain their businesses, depending upon how long. This last it could detrimentally affect their ability to continue operating.
At this point.
I'm trying to react to the downturn and minimize our own investments and pieces, because we can't tell how deep or how long. It's gonna go at this point.
And we're prepared to reverse all these things quickly, but at the moment, where we're focused on trying to control costs at this moment.
Got it and follow question other there had been long series of.
LD T. oversupply in China.
Particularly if demand growth had slowed or or declined our you see any evidence of you know more severe price erosion in Lv T., you know or what are your thought their understanding that now many of the retailers are close but is that a risk as we go forward here.
Over the past years, the price of LTT has declined as the production.
Processes have improved.
We have assumed that's going to continue for a while in the short term when you get overcapacities.
I don't know, what's going to happen with the prices as you go through.
Yes, but some people will try to run the assets.
And maybe impact the pricing, but the same thing occurs and all our product categories isn't the same time, the raw materials or decrease.
As it will have to see how all that plays out.
Your next question comes from Matthew Bouley with Barclays. Your line is open.
Yeah. Thanks for taking the question just back on the North America productivity, the 29 million how much of that was related to those lv t. rebates that you disclosed last quarter or was it all kind of true you know manufacturing productivity.
There was a small I don't know if it's in productivity. There was a small I don't think I don't know where it shows up.
But I mean, if you remember it was only a.
A limited amount of money I think it was about $13 million and it was spread over three quarters I'm not sure. If I got the dollar amount exactly right. This close yeah and it is it isn't productivity, but like Jeff said to small and then it doesn't flow through and even a mouse.
Got it that's perfect and then the since he discussed you know shipping product from inventory in the places where you know there where mandatory shut downs I guess to what extent, where you actually able to fulfill customer orders in those places, presumably you were not able to fulfill 100% a bit so should we think there's an.
He sort of pent up business as a result that that would actually moves the needle like.
I don't know how to measure it.
There were places where the inventories work sufficient to satisfy all the demand.
The customers.
Maybe waiting on it or maybe switched to other products and we don't have away knowing.
Is it.
Okay understood. Thanks much.
Your next question comes from John Lovallo with Bank of America. Your line is open.
Hey, guys I think he for squeezing me in here.
I guess first one just from a higher level do you think that coping 19 bull kind of expedite the can shift in consumer preference towards.
Harder maybe easier to clean surfaces.
We've been seeing happening over the past decade anyway.
I don't know of in any evidence that says its going to impact it.
Oh the choice in small the flooring choices were made for what's purpose you have how you like it what the attributes of the product or what your value proposition is in it. So I don't really see that having an impact at this point.
Okay, and then just quickly the would manufacturing footprint in North America in flooring rest of World you guys were doing a lot of work on Rightsizing that is that largely complete at this point.
What we did was we sold a solid wood plant in the United States, and we closed and engineered plant in check most of the box.
And we still have other wood plants manufacturing products, we have less capacity.
Those markets as alternatives type their place.
Okay. Thank you guys.
Your next question comes from Phil Ng with Jefferies. Your line is open.
Hi, This is actually a comment on for Phil.
Just wondering if you could talk about high decremental margins Nike Air in a different segment is different segment relative to your 35% to 40% guide.
You know.
I'm not sure we're prepared to get into that much detail you only color. We gave you was.
Yeah fixed costs vary.
From 15% to 20% in cost of goods sold and I'd say the ceramic segment is there's a higher.
The three segments there.
Fixed cost.
Okay.
And then just some free cash flow conversion. How are you guys thinking about that just given the changes over the past couple of months and if you can give any color on how you're expecting not working capital play out as you manager inventory levels that'd be helpful.
Well, you know, our historically and past downturns, our cash flow has has done reasonably well because.
Of declines in working capital inventories receivables and.
Also been able to push out some payables and pick that's probably going to happen. This time I think the other thing that you know you need to consider is a significant reduction we made in our capital expenditures.
And then Weve also stated that we will not be buying back stock in this current environment.
So you know free cash flow should be pretty strong.
Relative to the environment work.
As we move through a the rest of year.
Great. Thank you very much and good luck.
There are no further questions at this time I will now turn the call back over to Mr. Lorberbaum for closing remarks.
We appreciate everyone on the call, we're taking actions to adjust to the circumstances that were in each week reevaluating and changing our strategies, both short term and medium term.
Managers are taking different approaches by geography and product category based on a different markets and government actions. The business is a strong position today and will emerge in a better position.
We appreciate your time on the call have a nice day.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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