Q2 2020 Mohawk Industries Inc Earnings Call
This time I would like and welcome everyone to the Mohawk Industries' second quarter 2020 earnings Conference call.
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After the speaker's remarks, there will be a question and answer period, if he would like to ask the question. During this time simply press Star. Then then number one on your telephone keypad to withdraw your question press the pound key should anyone need assistance at any time during the conference. Please press Star then zero and then operator will assist.
Yeah.
As a reminder, ladies and gentlemen, this conference is being recorded Friday August seven 2020. Thank you I would now like to introduce Mr., Frank Boykin Mitch you.
You may begin your conference.
Thank you Erica.
Good morning, everyone and welcome to Mohawk Industries quarterly Investor Conference call.
Right well update you on the company's second quarter results.
I'd like to remind everyone that our press release and statements. 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 peers.
<unk> filings with the Securities and Exchange Commission.
This call May include discussion of non-GAAP numbers.
For a reconciliation of any non gap to GAAP amounts. Please refer to our form 8-K and press release any investors section of our website.
With regards to our recent litigation and related investigations, our audit committee with assistance from outside legal counsel and forensic accountants has substantially completed its internal investigation.
The company has appropriately filed its form 10-Q for the second quarter.
The company continues to cooperate fully with the government inquiry.
Beyond that.
We refer you to the disclosure in the 10-Q and remind you we cannot comment further.
I'll now turn the call over to Jeff for his opening remarks Joe.
Thank you Frank.
For the second quarter.
Hi, so the covert disruption our sales were down 21% as reported or 19% on a constant currency basis.
Adjusted operating income for the period was 36 million or took for some sales and our adjusted EPS was 37 cents.
During the period, our cost reduction initiatives working capital reduction and lower capital spending generated free cash flow of almost $500 million.
Oh sales trends have improved significantly since government restrictions were lifted the current environment at the most unpredictable and the history of our business as a pandemic has affected all markets and operations around the world.
During the quarter all of our businesses were dramatically impacted but most of our customers in facilities operating either in a limited capacity or completely shut down for some time.
Residential remodeling was impacted by retail shops closing and consumer staying at home.
Commercial have declined this business to postpone projects due to economic uncertainty.
<unk> housing starts in homebuilder confidence improved sharply in June as the market rebound.
In the period, our operations works Taylor stopped by government mandates employee concerns and lack of demand.
We responded to these challenges by keeping our workforce say cutting expenses and investments and Furloughing employees.
And the U.S. government program provided tax credits to our business.
Employment supplements have made attracting workers more difficult.
Outside the U.S. many government subsidized business is to keep workers employed and others required companies to continue paying employees that were not working in school.
After the company sales bottomed in April or May and June results appreciably improved across the segments I stay at home restrictions were gradually lifted consumers initiated remodeling projects stores reopened and construction increase.
Through the period, our markets improved more than we expected and our shipments exceeded our production rates, reducing our inventory.
Our manufacturing levels were impacted by government restrictions covert disruptions and employee absenteeism across the enterprise.
At this time, our visibility the future continues to be on certain due to persistent cobot spread.
The unknown strikes the economic recovery.
So near term factors represent a potential upside, including historically low interest rates rising remodeling activity consumer discretionary funds being shifted the home improvements and increasing home purchases.
Alternately potential changes in government policies consumer business spending and higher cobot infection rates could reduce man demand around the world, particularly the government's increase restrictions.
Given these factors our business plans must remain flexible to quickly adjust our production levels.
We are restructuring the business to enhance our results in future performance.
We're doing SGN, a our headcount.
And lowering performing.
And lower performing products and excuse.
We are closing less efficient operations and investing a more productive equipment. The larger these changes are in the United States, where LBC sales growth and strong and a strong dollar and impacted many of our businesses.
We anticipate these actions will deliver annual savings of approximately $110 million to $120 million with an estimated cost of $170 million of which 44 million will be in cash. Many of these actions are currently being executed with those affecting our manufacturing cost having to flow through.
You are inventory.
It will take much of next year to complete these initiatives and capture the full benefit.
Our business is well positioned with a strong balance sheet deep liquidity, we've recently issued over $1 billion of new bonds to enhance our ability to strategically invest and better position Mohawk for the long term.
We're taking the right steps to manage through the pandemic and we remain focused on delivering innovative products exceptional value and superior service. Our talented people are devoted to make mark the best born supplier to our customers improving our business in all areas and maximizing our results well that I'll turn the call over to Frank.
Our second quarter results.
Thank you Jeff.
Sales for the quarter were $2.050 billion down, 21% as reported but decreased 19% on a constant basis as a pandemic and related recession significantly impacted our business.
Our gross margin was 18% as reported.
Were 21.4% excluding charges compared to 28.8% last year.
The year over year decrease was driven primarily by lower volume shutdown cost negative price mix and unfavorable productivity offset by deflation.
The actual amounts of all these items is included in the 10-Q that was filed yesterday.
Yes, DNA as reported was $431 million for 21% of sales.
And 19.7% compared to 18.1% both of which exclude charges.
It was down $63 million were 13% excluding charges primarily from savings in for a long hours layoffs and government support.
Other unusual charges were $97 million, a fortune 29 million was cash primarily related to the 170 million dollar cost reduction initiative, the Jeff just mentioned.
We are adjusting our capacity by closing inefficient operations as well as consolidating some others, reducing the workforce and streamlining our SK use.
We estimate annual savings of approximately 100 intend to $120 million when complete.
Our operating margin, excluding charges was 1.7% compared to 10.7% last year.
The decline was driven by weaker volume shutdown costs and unfavorable price mix, partially offset by productivity and deflation.
Our decremental margin was 45% for the quarter.
Resulted from sales dropping faster than cost.
Our third quarter operating margin is expected to improve sequentially from the second quarter, but will be lower than last year with pressure on pricing and product mix along with higher manufacturing cost.
Looking at income taxes on a non-GAAP basis, we had no tax expense in the second quarter.
Going forward the rate could vary significantly in the next two quarters between 16 and 22%.
Due to changes in profit before tax and or geographic dispersion of income.
Our earnings per share excluding charges came in at 37 cents compared to $2.89 last year.
Turning to the segments in the ceramic segment, we had sales of $753 million down 21% as reported.
With the business down 19% on a constant basis.
The Russian business performed best with new construction and owned retail shops driving performance.
Our operating margin, excluding charges was 0.5% compared to 12.3% last year.
The decline was driven by higher shutdown cost and unfavorable volume and price mix offset by increased productivity.
In ceramic we expect the cost of our Reimaged restructuring initiative to be $80 million.
In the flooring North American segment sales were $800 million down 19% as reported.
As laminates perform best with this waterproof features in D. iwai installation appealing to consumers.
Our operating loss margin, excluding charges was a negative 2.2%.
Compared to 6.7% last year.
The decrease in earnings was driven by lower volume and productivity as well as shutdown costs offset partially by deflation.
We were estimating restructuring cost of $54 million in this segment as we consolidate production and distribution assets close high cost plants and reduce our workforce.
In the rest of World segment sales were $496 million down, 23% as reported and decreased by 20% on a constant basis.
Sales in the segment declined more rapidly in April but improved more quickly later in the quarter.
Our operating margin, excluding charges was 11.9% compared to 16.4% last year.
The main drivers were lower volume and shutdown costs, partially offset by productivity and deflation.
As we streamlined our product offering and reduced staffing levels over the next few quarters, we will incur cost of $36 million in this segment.
Our corporate and elimination segment.
At an operating loss of $10 million.
And we are expecting a total loss for the year of $39 million.
Jumping to the balance sheet cash for the quarter was $738 million and includes the remaining proceeds from the two bond offerings earlier this year after paying down outstanding commercial paper.
Receivables were $1.586 billion with days sales outstanding at 64 days compared to 59 last year.
Inventories were 1.922 billion and dropped almost $450 million were 19% from last year as all businesses made it difficult comps to their inventory.
Inventory days were flat with last year at 126 days.
Our fixed assets were 4.435 billion included in the quarter capital expenditures of $81 million and depreciation and amortization of 154 million.
In the second quarter, we cut our estimated annual estimated capital expenditures by $150 million to 400 million.
We're in the process of evaluating the amount going forward based on changing economic conditions.
Our DNA is estimated for the full year at $585 million.
Going to long term debt the balance sheet and cash flow both remains strong with total debt at $2.7 billion and leverage at 1.6 times net debt to adjusted EBITDA.
I remain our ratings all remain unchanged at triple B, plus or be double a one.
I will now turn the call over to Chris to go through the segment results in more detail Chris. Thank you Frank.
And the global ceramic segment all of our businesses around the world were impacted by government reactions to the pandemic within a segment Southern Europe, and Mexico implemented the most dramatic regulations suspending commerce and our operations for extended periods of time.
To improve our performance were reducing our cost and complexity and aligning production with demand why all of our businesses have improved future demand is uncertain and we will respond as conditions change.
In the U.S. ceramic market many of our retail customers were closed for some time well construction continued in most markets the northeast Midwest regions, where most impacted during the period due to greater state restrictions for example, our ceramic manufacturing and Pennsylvania was closed for an extended time.
Along with most of our customers in that region.
To manage the situation, we reduced cost across the business, including furloughs to decrease our overhead cutting marketing activity differing product introductions and controlling manufacturing and distribution cost.
Demand increase faster than we anticipated and our inventories declined as we ramped up production.
Presently all of our U.S. plants are operating and our service level is improving.
Our new click ceramic tile is being delivered to our customers and sales should increase throughout the year.
Our new countertop facility in Tennessee has become profitable and will improve with higher volume and mix, we have began producing higher value products with more stylized colors and veining.
Our new B to B systems are making product selection ordering and picking up faster and safer for our customers and employees. We have implemented measures that exceed CDC guidelines to keep our workforce safe.
Given pressures on the U.S. ceramic industry, we're consolidating manufacturing into our most advanced facilities and closing our least efficient assets. We're combining some of our sales service centers, where they overlap in local markets was lower commercial activity, we're refocusing our sales efforts to broaden our.
Position in new home construction.
We're taking out lower volume SK used to reduce complexity and improve our cost we have made permanent staffing reductions to reduce our fixed cost and aligned with current demand.
The Mexican Gonna economy has declined significantly impacting employment retail and construction our manufacturing operations in Mexico are currently running but were limited during the second quarter under government orders. During this time, we were required to pay our workforce without any government assistance.
All of those plants are currently running and most of our customers are open for business.
To reduce our cost we're rationalizing our current product offering and aligning our production and workforce with demand.
As the peso as weekend, we're increasing our position in the premium markets to replace imported ceramic and introducing promotional products to increase our sales.
The Brazilian economy is contracting is the cobot pandemic reduces business activity interest rates are at historical lows and government programs to stimulate housing sales are being introduced our sales are improving as retail stores, we opened in Brazil's major cities.
Our exports have expanded as local currency has weekend.
With inventory's low we're increasing our production to support local sales and improve our service, where further improving our cost structures and reducing our workforce.
Our southern European ceramic business was impacted during the period by severe lockdowns, especially within Italy, which was the epicenter of the cobot crisis.
Both our customers at our plants were completely shut down for extended periods. Presently we have limited cases of the virus due to safety measures in the local communities in our facilities.
As the country's opened up our sales dramatically improved.
Our eastern European operations were less affected and demand has improved significantly.
Our European exports to other continents are down substantially as major projects have been postponed around the world.
All of our plants in Europe are ramping up to satisfy demand and service levels should soon approach our target.
Continued government subsidies are being used to manage our ongoing cost.
We are introducing fewer SK use this year and our paring down less productive ones.
As with the last downturn, we anticipate high rates of business failures in some of our markets due to their weak economies.
In Russia, our ceramic business declined significantly when the country locked down as strong physician and new construction and our owned and franchised retail stores provided us with better market access and benefited our business.
Sales improved through the quarter and our plants are now operating as similar rates to last year, we're placing a greater emphasis on the new construction channel, which the government is investigating to support the economy.
Our flooring North Americas segment sales declined substantially in April and then improved throughout the quarter as government restrictions were lifted and consumer started shopping and remodeling in their homes.
With most home centers remaining open products, such as our premium Lamin outperformed as homeowners ticket took undertook new d. iwai projects, our inventories declined as sales improved faster than our manufacturing ramped up.
Many of our operations are facing challenges increasing production due to local health concerns and our communities.
To enhance the segment's performance, we're reducing our overhead cost and lowering our SGN, a we're taking out higher cost manufacturing assets and consolidating distribution points, we're streamlining our product offering and investing in more efficient assets to reduce cost.
Our Lv T cells improved as government restrictions were gradually lifted across the country a significant part of our LPT distribution is through specialty stores, many of which were closed for periods of time.
As our Lv T cells improved in the quarter, we're increasing our production.
Though the spread of the cobot is creating challenges we've improved our manufacturing speeds and processes. However, our progress was slowed because European technicians were unable to travel to the U.S.
We are upgrading our manufactured in sourced LPT offering to provide enhanced visuals and features while reducing complexity of our collections.
And residential carpet the new home construction channel performed best with housing improving through the period, the remodeling category show slowed as retail and installations activities was suspended in some regions our mix and pricing declined as the higher value remodeling channel was more impacted and lower price poly.
Mr performed better.
We are increasing our production to me greater demand and improve our service levels.
The commercial sector continues to be challenged as many businesses are postponing new investments the education and government sectors were impacted less and the hospitality channel contracted the most we're providing both virtual and local outdoor advance to support architects and designers working remotely.
We believe commercial projects will continue to be delayed and the sector will take longer to recover.
I rug business was severely impacted during April as many of our retail customers were completely shut down and their inventories were not replenished as the period progress home centers and mass merchants rebounded first as consumers you start rugs as an easy way to enhance their homes.
Ecommerce continues to grow and its importance as a sales channel for our red collections were increasing our production to improve our service and meet our customers' needs.
Our laminate business outperformed our other categories as consumers increased the iwai projects, while at home, where operating all of our laminate capacity to satisfy this increased demand.
Our unique technology provides waterproof solutions and superior visuals as alternatives to other hard services.
We're expanding our laminate manufacturing to support our growing market and introduced a next generation technology, which we are presently selling in Europe.
Flooring rest of World results continue to outperform our other segments.
We were able to take advantage of more flexible government support as well as cut our expenses across the business, our laminate and Lv tea categories performed the best in the period.
As LPT production in China has recovered our patent licensing business has fallen as we went through the period, we saw strong improvement in sales as stores reopened and replace their inventories in the segment, we have a much greater presence in the residential remodeling, which is performing better than the commercial category.
Our Australian and Russian businesses held up better than Europe due to different government approaches to the pandemic.
Across the segment.
We have reduced our overhead cost enter consolidating lower volume SK use we're now increasing production to meet emerging demand, while protecting our employees health.
Our laminate business outperformed our other products as our waterproof collections and new introductions are increasing consumer preference for our products.
Through our Internet presence, we're supporting our retailers by expanding their online sales in Russia, our laminate sales declined less and we are increasing the plants production to satisfy demand in other regions.
Our flexible and rigid Lv t. sales improved as we progressed through the period as retailers reopened and our key markets. Our manufacturing plants were also impacted and are increasing production to satisfy growing sales. Our residential sales have recovered more than commercial as businesses have deferred projects in Europe, where my.
Manufacturer almost all of our Lv tea and its positively contributing to our results.
We're continuing to modify our processes to expand their capacity reduce our cost and introduce new features into the market.
In Europe, our sheet vinyl is sold primarily through retailers and sales were significantly reduced by store closures, especially in France in the UK.
As in other categories. Our business has recovered and we are expanding our production to satisfy our customers.
In Russia, our new sheet vinyl plant contributed positively to our results and we have broadened our product offering to increase our market share.
Our insulation business was primarily impacted with covance.
With our markets in Ireland, and the UK affected the most when restrictions were lifted the category rebounded in June as contractors completed projects already underway.
We are expanding our customer base and the geographic reach of our products are Woodbridge faced similar plant disruptions, which impacted both our sales and margins, we introduced a new virtual showroom and developing specialty products to improve our mix.
The start of our new waste to energy plant was delayed due to the pandemic and isn't now full operation.
The cobot crisis was handled differently in Australia and had a less detrimental impact on our performance. The Australian market has largely recovered and we are seeing improved residential carpet sales our European LPT collections were introduced during the period and our expanding our hard surface sales in the region. This month.
We implemented price increases in Australia to offset cost increases.
New Zealand's government enforced one of the most comprehensive block downs in response to the pandemic, resulting in significant sales declines during the quarter New Zealand's economy is now open and the virus is currently contained and our sales are improving.
Now I'll return the call back to Jeff.
Thanks, Chris.
Since April we've seen substantial improvement in all of our segments and markets. The residential remodeling a new construction channels have recovered more than commercial or businesses are maintaining a cautious approach to investment.
Some areas, particularly in the U.S., Brazil, and Russia are experiencing an increasing level of coated cases, which are impacting our operational costs and production levels.
Across the business, where decreasing costs by rationalizing asset minimizing SGN, a reducing our workforce and managing our product offering and working capital.
Much uncertainty remains around all of our markets regarding government policies business confidence in consumer spending.
Our sales in July were approximately flat compared to the prior year, but we cannot predict how the sales will evolve going forward.
Given this we are unable to provide guidance for the third quarter.
So we anticipate a significant improvement our results from the second quarter.
We managed through.
The challenging second quarter, while generating significant cash flow strengthening our balance sheet and issuing over $1 billion in bonds were taken substantial actions to navigate the changing environment and position Mohawk for the future.
Well now be glad to take your questions.
Ladies and gentlemen at this time, if you would like to ask a question. Please press Star then the number one on your telephone keypad.
Requested to limit.
One question.
Your first question comes from keeping with it truly securities.
Mr. He's your line is open.
Yes, Thank you and the second quarter, the reduce capacity with the because obviously on the numbers second largest.
What do you guys capacity it looked like from the third given what you see in July.
You do that dollar to your view or whatever that's where describing.
I'm sorry, the questions what what's the capacity.
Yes, I mean, how what kind of capacity right are you going be running out you cut a lot in the second quarter to get inventory down whats the kind of look like in the third cycle.
The third quarter were running.
This is a much higher right. When we were we're actually trying to increase the inventories because I see crudes too much but we're having difficulties getting them up given the labor issues vacations in Europe, and other things so they're going to run a much higher right.
Will you be equal the rights third quarter of last year.
It depends on business sector pieces, there all over the flows one of the food.
End markets, Keith is not performing as well as you know is commercial.
So as an extent, we've got commercial crash used to be running at lower rates.
And I guess part of question you talked in the.
Intro about margins.
Off in the third from the second the down year over year is capacity curtailments. The major driver was going to be down year over year or something.
Well, we've got several things that we think you're going to be impacting us we'll have pressure on pricing.
No pressure on product mix.
Volumes are also going to be a issue for us.
And I think like Jeff mentioned.
Even as we're trying to get our inventories.
Now.
We are going to have higher manufacturing costs.
Due to coated labor issues.
Shorter product runs as we try to.
Rebalanced some doors.
Okay. Thank you.
Your next question is from Justin Steve Zelman Associates.
Thanks, guys. Just one quick question on the Oh, the trend you mentioned flattish trends. The July are there any major distinction the by by the segments are they all kind of trend trending similarly into July.
Yes, We said July was basically flat compared to last year and.
Improved more than we had anticipated and overall rest of world is better than the other two category other two segments.
Then the other thing and just in terms of the phasing of the benefits to profit from the restructuring efforts that you've already taken how should we think about that phasing.
In the back half and then and then as we think about I am I know you mentioned annualizing it in 2021, but in the back half.
That should be an offset we would I would assume just some of the other headwinds that you're seeing but but you're saying that the other headwinds will be more than that so.
Sorry. Your question is on the savings how they're going to phase then it was that your question.
Right. So you're just kind of following on Keith question about the year over year change in margin being maybe pressured from some of the up some of the actions labor issues shorter productivity Ron's I guess those will not those will more than offset any kind of benefit from the phasing to restructuring, but just curious if you could quantify some of the tailwind from just the restructuring efforts that you announced.
The 100 million dollar charge, you took in the and the second quarter.
Yes.
No what happen we started out with basically on our experience from 2008, nine we decided that the business was going to slow down we're going to take more aggressive actions earlier to improve our position where that would cut NSP, united reducing the workforce for streamline our product offerings.
Closing less efficient plants investing more efficient assets, which we got to the $110 million to $120 million of saving.
It will take through next year to complete those and capture the full benefit the manufacturing savings don't forget will have to flow through inventory, which will be you know three to five months later, depending upon what it is where it is.
We estimate just a really high level that the savings will range from about $15 million to $25 million.
Quarter until we achieve the results that we expect and it just as a comment remember that the margins for everything a really dependent on the future sales and in the short term covance affecting it we're really not sure whether going a bit.
Well that makes sense, if I could speak one more and on this subject just thinking about the broader trends thinking about of the actions that you're taking in terms of capacity rationalization I guess, how much of your non LPT businesses are going to be rationalize from these efforts and our these adjustments just reconciling for the relative share.
Your last LBC, that's already taken place are these accommodating for maybe potential further erosion to lv tea in the future.
We are.
Turning the business up at a level, we think that will be needed to be yet for the future. We've made the adjustments in the ceramic capacities with consolidated some of the higher cost assets in the flooring rest of world I mean in the flooring North America, and then with taking cost out in every part of the business in every segment and.
Dissipating that it's not going to be a the straight up and stay there.
Thank you very much guys.
Okay. Thank you.
Your next question is from Mike dialogue with RBC capital markets.
Hi, Thanks for taking my questions.
A question first question is really around from a channel standpoint in the U.S.
You remind us how much for your business goes into specialty and.
You know boat and for North America, and global ceramic and then given the relative restrictions on specialty versus home centers in the quarter. How do you think about the share shift dynamic and whether or not that's just kind of accelerated share shift towards home centers over.
Over the medium term or whether you're.
Whether specialty channel can kind of play catch up to that.
Well, yes, a lot of different questions. The a specialty channel the whole center channel and most of the market's stayed open through the piece. So what happened is especially stores or shut down and the only place for customers to buy our products for in the home centers in many markets over the period that change to that.
Yes, that's a temporary or change in the business.
In total over the past 15 20 years the home centers have continued to expand their participation in the market and take share and it's different by product categories. The.
The larger the category doesn't do it yourself and or.
Some of the different contracting businesses depends on where it ends up and what's channel again, so I don't see this thing apart.
Significant change in a short term, but just the same continuation they've been on.
Okay got it thanks, Jeff and second question just back on the restructuring.
I understand there has been spare capacity and then.
Probably some some underperforming skus in terms of things that are getting.
Hi, there consolidated or rationalized is there any.
Is there any sales impact we should be thinking about though and when you take out this much capacity and you take out some of the skews do you think there's a corresponding.
Sales impact or is this really.
The youre going to be able to replace any any lost sales with.
With other kind of productivity measures.
For being more aggressive in getting rid of low volumes can use the we have alternatives to the products to offer the customers, but there's always risk trying to transition one of the other the goals going up with more business was a more consolidated awesome.
Okay. Thanks.
Your next question is from Eric Bosshard with Cleveland Research.
Two questions first of all the throughout the segment, you talked about price and mix pressure.
Curious if you could just expand on that a little bit where you're seeing that and what is what is driving that and then also the.
Ongoing outlook for price and mix.
Correct and all the different categories.
First is the commercial businesses tend to be higher higher margin in the residential businesses.
Parcel businesses have taken a bigger yet and are coming back slower and we're not sure how they're going to evolve over time within the other pieces. The more promotional products are tending to sell more than the other during the downturn.
Some because the higher end shops in stores that sell the people that had you know full backs in the market more we're gonna have to see how that evolves going forward.
It's a little early to tell what the if it's going to be a permanent change or not we're just assuming that the market's going to be more difficult and we're going to have to respond the competitive.
Positions all around the world.
Then going forward I mean.
We've said.
Numerous times, we ever really hard time.
Looking out beyond just a few weeks in this environment, but.
We would anticipate that we will continue to see price mix pressure going forward through the rest of this year.
And then a follow up on restructuring.
It sounds like you've outlined a good program Im just curious when considering.
What's taken place in the industry, especially in the U.S. the less number of years than the contraction and operating profit of the company in total.
If you had considered a larger program aimed at generating.
More cost out more cost savings.
Or is that just unreasonable with how the business is set up or or how you're you view. The market. Just curious so there was a program that could have netted two or 300 million of savings or if that's just not reasonable.
It all starts with how you perceive the market's going to be in the future and what you need to satisfy.
The moment, we believe that the changes we made are set up for how we believe that suggests that the business is going to be for the next few years, but love to see what happened.
[noise] [noise], Okay fair enough. Thank you.
Your next question is from Matthew Bouley with Barclays.
Hey, Thanks for taking the question.
Lot of discussion around the costs that are being cut but I think Jeff you mentioned a in the opening remarks that.
The billion dollars bonds that you know there were some attention around strategic investments. There I guess, just if you could outlined some of the areas that are sort of top of mind for investment.
We're always looking at.
Acquisitions will go through at this point, it's a little hard to aggressively do acquisitions given that you don't other environment cases, but we're always talking to different people in acquisitions on the business. We're trying to minimize the capital investments for the moment, but we believe there will be greater visibility in the not distances.
And we'll start changing it.
If you go back a month and a half ago. There's a record was stop everything to stop and we really haven't moved from that at this moment Butler trying to decide what it should be in every week, we get a better view of the market and what we should do.
Okay got it and then just as my follow up in U.S. ceramic I think you mentioned something about refocusing on new construction could you talk about what the exposure is now and what you want to get that do and kind of the implications on price mix there.
Well, what we're saying in the U.S. ceramic just like the others commercial is slowing we.
We are they are finishing existing projects that we anticipate that slowing but we also think theres a significant opportunity in remodeling and new construction, so were taking advantage and moving our as sales and assets in that direction.
Okay. Thank you.
Your next question is from Michael relate with JP Morgan.
Hi, Thanks.
Good morning, and its Mike re heart, Thanks for taking my question.
So I just wanted to circle back for a moment to the.
The cost savings and.
I believe Jeff you had said or Frank that.
You are kind of looking at a 15 to 20 million a quarter I wasn't sure if that was something that you would expect.
Will kick in in the third quarter.
Obviously talked about there being up a lag.
The manufacturing benefit.
We might not see that impact until let's say the first quarter of 2021.
Hi, this is really hoping to get a sense of the.
On grid and 120.
Million.
Overall annualized savings.
How much is expected to be realized 2020, <unk> and specifically threeq and Fourq. He thinks we're expecting like Jeff said to average between $15 million to $25 million of savings the quarter, we're expecting to start realizing savings in the third quarter, but we're also saying that you know as we go forward.
We expect that margins are going to be impacted.
By volume, so and that's a big question Mark right in terms of how the volume returns or not.
As well as short term labor impact from cobot virus, how that might impact the workforce and productivity as we continue to rebuild or inventory and get it back to where it needs to bid.
And and the 15 to 25 million that would be kind of proportional along the lines of the restructuring costs.
George breakdown that you had said before the 80.
Ceramic et cetera.
No not necessarily.
Hi, Thank you how should we think about the breakdown by clanking thing, yeah, we weren't going to disclose.
All right, let me kind of shifting gears, a second to the sale side.
You know.
Equally or.
How did the strong decline across the board in a pretty tight range in the second quarter, Frank you mentioned that.
We're July rest of World did a little better.
Then the other two segments.
So if you're flat that would kind of imply.
Yeah, a little bit of growth, let's say for the rest of world and maybe a little bit of a decline.
The other two segments.
Any type of directional thoughts around the degree of magnitude for each would be helpful.
And you know it if you're seeing a better rent, let's say in one segment versus the other in terms of what you've seen throughout Q emerge would also be very helpful.
No. It's Mike it's hard like we've said too to give a lot of lot of guidance on on how things are developing over very long period of time and you know we.
Ah, Yes, we right now what we're seeing is rest of world is coming back.
More quickly I think as I mentioned, they went down a more quickly but come back more quickly as well.
Second quarter also in rest of world.
You know they have more of their business.
In residential as opposed to commercial.
Herschel's as Jeff mentioned was being impacted more by this has not come back as much as residential that in addition, they have a more of their business in both laminate and there will be T. In those two categories have also performed well.
The business is really obscure because right now.
In the Europe business and the rest of World, We can't tell whether the ordered we're seeing now are filling the pipeline in the channel and they're trying to get ahead due to.
The what they didnt pick up that they normally do going into the vacation season or whether this is a a view of ongoing business and I think question. We haven't everything we're doing the business has improved the orders are improving but we can't tell what is projects that were started in.
Mid April may set or postpone the now and are they going to continue at that rate or is there a bubble we can't tell.
What's going to happen with businesses investing in the business and all through the piece, we can create dramatic since scenarios in either direction and the reason, we're not giving guidance as we don't know which one's going to probable.
And as a reminder, ladies and gentlemen, we request that you limit yourself to one question.
Your next question is from Stephen Kim with Evercore ISI.
Thanks, very much guys just wanted to.
Sounds good question longer term about flooring North America.
I guess, that's a start up a little surprised that you mentioned that the improvement.
You did generally better than you expected emotionally it sounded like in flooring rest of world not flooring North America. So I just wanted to clarify did the U.S.A. operations in general exceed your expectations as well.
But I'm more longer term question about margins in flooring North America.
One thing that investors are concerned about it the idea that FNB margins or maybe artificially high you know a few years ago as inventories were rising and that maybe there is that there's a fear that some of these lower margins than we're dealing with more recently are more reflective of the margins going forward, but obviously, there's a lot of.
Near term things that are weighing down the margin. So I'm wondering what you think the longer term margin structure in flooring North America looks like is it reasonable to think we can get back to where we were a few years ago your mid to high teens.
Or.
Once these discrete challenges are behind you or do you think that the longer term margin structure is maybe a little lower than it was at that time.
Well, let's start with the first question, which was.
What's the what different than our projection everything I mean, when we went into it we were projecting the market to be much more difficult and not to rebound as much as it has to one hour pieces, we're preparing for a much.
Much longer slower recovery than we've seen at this point now how it's going to go on from here is anybody's guess isn't that the first one oh, we can some of the.
Flooring North America.
We change managements, a little over a year ago, we're continuing to put different processes in place improve our operation.
Run better.
Improves our.
Margins and profitability in the business and we have a huge amount of activities going on do that we expect the margins to improve let's see how far we can get them.
Okay.
Thanks, guys.
Your next question is from Sam Darkatsh with Raymond James.
Good morning, Jeff Good morning, Frank how are you.
Good.
Question took a two questions I'd hope it a quick so I'll be allowed to ask them.
In light of your being under inventoried at the end of the second quarter I'm guessing that included Stockouts. So your July sales results being flat I'm wondering how much of a benefit July saw from shipping unfilled orders from Q2, and how much of it really is truly current demand I'm trying to get.
In a sense of the sustainability of that July trends.
The.
The.
Order backlog are still some we haven't been able to push the backlog down because the sales have been going up so we still need to get the inventories up and we haven't gotten them up high enough to achieve the service levels, we want a one side, but it goes back to the prior comments, we're not sure.
How much is this is a bubble from before and how much is inventory in the channels. So.
Answer your question any both those and we don't have.
And my last one would be given FIFO.
Should we expect input cost benefits to accelerate going forward and the piano.
Not sure they're going to accelerate we're going to continue when you say input costs, you mean deflation materials.
Yeah, the benefits from from input costs, Yeah, Yeah, I think youre, we will continue to see benefits going forward, but I wouldn't say they're going to.
Probably a benefits is going to increase sequentially and some of the businesses are different businesses. The price mix is offsetting the ER.
The decrease in raw materials in many cases.
Very helpful. Thank you.
Your next question is from Phil Ng with Jefferies.
Hey, good afternoon, everyone I'm, just curious where are you if you're a journey optimizing your LTC I'll be two facilities in North America in terms of breaking even looks like the exemptions on imports or at least going away for now you have that ability kinda meet that demand as your capacity ramps up this back out is at a nice windfall for you guys.
Let's start on what he's talking about is.
There were duties on clip LDL C that were withdrawn a year ago for a year.
I think it was yesterday the government has reinstated the.
The duties on those products with that.
What we.
Thanks going to happen as the reverse of what happened last year was that the industry will have to increased prices to cover the tariffs, which should increase the value of our manufacturing.
We go through.
Within the businesses. The European operations are ahead of our U.S. operations and their improvements the European operation, It's all profitable today, and it's going to continue to improve as we continue to enhance the.
Operations and take costs out the U.S. improvements are following but again I think we said it before we had expected to have multiple engineers over here all through the second quarter, helping the group through the same thing we've already done I don't know you'll know that you can't travel between too so all of that's than postponed.
But we are whether without increasing the production speed processes.
And all of them at the same time, we're introducing new products and styling to help the business as we go through so I think it should help us I think we're getting better at it and we're turning the corner.
Okay. Thanks, a lot.
Your next question is from Tim well just with Baird.
Hey, guys get a good morning, I just had one question on on ceramic is there a way just with the restructuring, but you could frame for us in maybe percentage terms and structural capacity that you're reducing within the ceramic business.
Yes were only a reducing capacity in the U.S., we're taking out or at least deficient assets, which is about 10% to 15% of the total and that'll improve our cost, but yet support our future needs.
Okay, great. Thank you.
Your next question is from luck, Laura Champine with <unk> capital.
Thanks for taking my question, it's about a disclosure in your 10-Q that says that earlier. This week. Your audit Committee completed an investigation a of certain allegations is it fair to say that if material restatements were deemed necessary those would have been.
Take in in this quarter or is that the wrong Reid.
He's thinking.
You know.
Like like we've said earlier in my intro, we outline.
Basically what we could say and talk about with regards to that.
You are asking if the financial statements are correct, yes, the financial statements are correct.
But beyond beyond that with regards to the investigation like I said, we really can't really can't comment.
Understood and then if I if I can get a quick follow on on to the previous question have you disclosed the youd utilization rate in your L. B T plants in the U.S. right now just to give us a sense of how much volume you can serve as as hopefully demand picks up there.
And we haven't but what's happening is the capacity is increasing as the productivity and efficiencies are going up so we can service business.
Significantly greater than we have.
Understood. Thank you.
Your next question is from Susan Maklari medical with Goldman Sachs.
Thank you good morning.
My question is around the mix shift you know you commented that you're seeing that as an ongoing pressure in the business, but in the U.S. is we have seen that consumers are perhaps shifting some of their spend more to home improvement. How are you seeing that that's driving any benefit in terms of the mix and then I guess when you kind of think about the mix shift.
You are seeing there how does that compared to past recessions and how much of that is due to maybe underlying ships in the industry as we've gotten this growth in l. BT and some of these newer product categories that have come through.
Each different product category is different from each other and carpet is ongoing trend of polyester selling more you also have a mix in channels. So the home builder channel.
New home construction channel is a lower mix that are.
Retail channel so as retail didn't do as well as <unk> as a.
The new home construction that also impacting that you go through so there's channel mix as well as customer mix going on.
In a different businesses. There you know, they're all different in my ceramic business and my laminate business, we basically participate in the mid to high end of the business and it's growing.
Growing and its use.
As alternatives to other hard surfaces, that's being used in both the retail and the new construction business much more so and our products are outperforming in those places.
The ceramic business the mix.
Has decreased somewhat because some of the product categories are impacted by L.P. using some of the higher on stuff and then you have the commercial.
Commercial mix, which is much higher and all the businesses. So.
Product changes consumer changes and channel changes all at the same time.
Okay. Thank you.
Your next question is from a Kathryn Thompson with Thompson research.
Hi, Thank you for taking my questions. They are just on revisiting the the due to yesterday on the tariff.
Okay. So you could get a little.
More clarity in terms of are there any timeframe.
So in other words.
There are certain tariffs to have a certain.
And they to them is it.
As we know definite and then what does this mean more specifically for your operations.
Just the U.S., but also in terms of global sourcing. Thank you.
See Tara.
Then were tariffs put on originally 25% on all products a year ago.
Today.
Took the tariffs off.
Click LTT only.
They did it for a one year period and they came back from a new the renewal was turned down so the 25% starts.
I don't have the Dayton front and center opens today, yes. It may start today.
I'm not sure as yet and so ought to start paying it and then we're going to have to get the prices up in order to cover.
Not sure I've got the whole question.
It really is since there's nothing in terms of yeah, you answered one part, but then the second is what's the.
The real impact and you have some good presidents from previous parents in terms of your expectations and how it will impact that picking a product category profitability.
Well the.
When the tariffs went down the industry drop prices somewhere in the 15% to 20% range. So I'm assuming that the prices are going to go up in the 15% to 20% range as yet and.
Anytime that anything that we're manufacturing outside of China.
We better off than it was before.
Okay, great. Thank you very much.
Your final question comes from at Truman Patterson with Wells Fargo.
Hi, Good morning, guys. Thanks for taking my question.
So your Capex you guided toward a 400 million, which you said you're evaluating you know I think a portion of this you know you have capacity projects that are probably partially unfinished in your pipeline.
Just how much additional capacity do you think you're going to bring online in the back half the year and into 2021 and can you just remind us what products those are in possibly geography.
Okay.
Stopped at all.
Increases in capacity. When this then started so whatever was whatever was already started we continue the biggest one that I remember off the top of my head is we are expanding our laminate production in the United States with a new production line with new capabilities into the.
In.
Next year.
We're running all of the capacity that we have now and were looking at importing some from.
Our overseas business is to support the business in a short term as.
We had some capacity increase a this year.
The a Russian business I think there was a Russian ceramic business I think there was some in the.
Eastern European ceramic business, both of which are running at fairly high rates and we expect to use them all.
As it limited was the bigger pieces, where new businesses. So we said that the.
Sheet vinyl business would put on new lives in Russia, it's turned profitable and yet the LP kilotons in Europe have turned profitable in it.
The.
Carpet tile mines in Europe.
We are investing all that all the cash we have we're investing back in expanding our sales force to expand the distribution of yet as we speak.
And then going forward, we're going through a strategic planning process now to determine what's the right level is and where to invest in I'm, assuming most of its going to be in enhancing the product mix and enhancing the product offerings with no new features and benefits versus large capacity expansions.
At this point.
Okay. So so just for clarity the only line or products that you might be bringing online over the next you know year year and a half a is really just a laminate line in the U.S. everything else has already been open.
Ah yes.
At this minute okay. Thanks.
Okay. Thank you.
Thank you for your question Alan I'll turn the call back over to Mr. Lorberbaum for closing comments.
The business in an environment has gotten much better than we expected.
Taking actions to manage through the changing environment, we're continuing to manage our cost structures and we'll continue adjusting as needed. Thank you for your time and joining us today.
This concludes today's conference call. Thank you for participation you may now disconnect.
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