Q3 2020 Mohawk Industries Inc Earnings Call
[music]. Good morning, My name is Mike and I will be your conference operator today at this.
I would like to welcome everyone to the Mohawk Industries' third quarter Twentytwenty earnings Conference call.
All lines have been placed on mute to prevent any background noise.
The speakers will be a question and answer period, if you would like to ask a question. During this time simply press star one on your telephone keypad to withdraw your question. Please press the pound key should anyone need assistance at any time during the conference. Please press star zero and an operator will assist you.
As a reminder, ladies and gentlemen, this conference is being recorded today Thursday October Thirtyth 2020. Thank.
Thank you I would now like to introduce Mr., Frank Boykin Mr., Frank Boykin, you May begin your conference.
Thank you Meghan good morning, everyone and welcome to Mohawk Industries quarterly Investor Conference call.
Today, we will update you on the company's third quarter results.
I'd like to remind everyone that our press release and statements that we make during this call may include forward looking statements as defined in the private Securities Litigation Reform Act of 1995, which are subject to various risks and uncertainties, including but not limited to those set forth in our press release and our periodic.
Fillings with the Securities and Exchange Commission.
This call May include discussion of non-GAAP numbers.
A reconciliation of any non-GAAP to GAAP amounts. Please refer to our form 8-K and press release in the investors section of our website.
In addition to just say Chris joining us today on this call is Jimmy Brock our corporate controller.
As we previously discussed we disclosed we received subpoenas from the Department of Justice and the Securities Exchange Commission related to allegations in a class action lawsuit filed against us.
With the assistance of outside legal counsel, our audit Committee completed a thorough internal investigation into these allegations of wrongdoing and concluded that they are without merit.
We're cooperating fully with the ongoing governmental investigations and will continue to vigorously defend against the law suit.
Which we do not believe has merit.
I'll now turn the call over to Jeff for his opening remarks Joe.
Thank you Frank.
Our third quarter results significantly exceeded our expectations with sales recovery and operating income substantially increasing from last year's levels under.
Under continued pandemic conditions people all over the world are spending more time in their homes and working remotely.
Hopefully this trend increased investments in home remodeling as well as driving new home purchases.
All of our businesses and geographies were stronger due to higher demand and customers increasing inventory in our distribution channels flooring.
Flooring rest of world delivered the strongest results in the quarter.
Our northern European Russian and Australian businesses were less impacted by the pandemic.
Our global ceramic in flooring North America segment also improved substantially pumping more affected by cobot and postpone commercial projects.
Our laminate Lv t. and sheet vinyl outperformed our other categories and our new plants improved their output and efficiencies flood.
Fluctuations a worldwide exchange rates negatively impacted our <unk>.
By about $7 million.
With declines in most currencies offsetting the strengthening euro.
During the period demand for our products exceeded our productions and inventories declined by about $80 million as we've ramped up plants across the world.
Our increase in manufacturing in the period was limited by challenges with hiring training and capacity.
To cover higher operating material logistics costs, we've announced selective price increases in some markets and product categories.
We made significant progress on our previously announced restructuring actions and are aligned with our planned schedule and savings.
The one response to higher demand levels, we have postponed some restructuring projects, while we assess future conditions.
Our business has responded to the cobot crisis.
As our focus has remained on keeping our <unk> employees sales throughout.
Throughout our offices operations and distribution systems was implemented procedures that exceed the public health guidelines were tracking all identified cases testing all contacts and successfully containing the spread within our operations throughout.
Throughout the pandemic our people have collaborated to protect each other and support our customers around the world.
Even with our improved performance in the period, our visibility of the future remains very limited as Koby cases increase governments may expand restrictions on commerce and reduced stimulus activities. In addition, future consumer spending is uncertain.
Business investments remained low and inventory growth in the channels could change we.
We continue to monitor a health information and market trends to respond to the evolving conditions in our markets.
In the second quarter, we took advantage of the favorable rate environment to pay off 1.1 billion of short term debt and pre fund our future long term maturities and the third quarter, we generated about $530 million of cash, bringing our cash balance to 1.2 billion at the end of the.
Curious.
We will pursue additional investment opportunities, including internal growth acquisitions and stock purchases as the pandemic and economies improve.
We believe our stock represents an attractive investment and our board of directors recently approved a plan to repurchase $500 million of the company stock.
I'll turn the call over to Frank for a review of our third quarter financials.
Thank you Jeff sales.
Sales for the quarter were $2.575 billion.
<unk>, 2% as reported and on a constant basis.
The rest of World segment performing best.
As a note for next quarter, our sales will be impacted by two more days compared to the previous year.
Our gross margin was 27.4% as reported or 28.3% excluding charges, increasing from 6% to 27.8% last year.
The year over year increase was driven primarily by higher volume productivity and lower inflation, partially offset by price mix.
The actual amounts of these items will be included in the 10-Q filed later today.
Alright, DNA as reported was $443 million or 17.2% of sales.
Or 16.9% versus 17.8% in the prior year, both excluding charges.
This was primarily impacted by favorable productivity of $21 million.
Our restructuring charges were $32 million for the quarter of which 6 million was cash or a restructuring and other savings are on track with our original original plans.
Our operating margin excluding charges was 11.5% improving from 9.9% last year.
The increase was driven by stronger volume productivity and declining raw materials, partially offset by unfavorable price and mix.
Interest expense was $15 million and we expect interest next quarter to be approximately 16 million.
Our income tax rate was at 17% this year compared to 18% last year.
We expect the fourth quarter to be approximately 5% and then returning to historical levels ranging from 20% to 21% next year.
Our earnings per share excluding charges was $3.26.
18% from last year.
Turning to the segments in the global ceramic segment sales were $911 million down 1% as reported with business up almost 2% on a constant basis.
The non U.S. businesses turned in our best performances in this segment.
Our operating margin, excluding charges was 10.3% or 110 basis points compared to the 9.2% last year.
Our interest was from productivity and volume, partially offset by unfavorable price mix.
In the flooring North American segment sales were $982 million down 2% as reported with growth in all major categories, except in.
In all major categories, except the more profitable commercial end market, which remains challenging with postpone projects and slower office and hospitality.
Operating margin, excluding charges was 8.2% compared to 8.7% last year.
The decrease in earnings was driven by lower margin and price mix, partially offset by favorable productivity and lower inflation.
In the flooring rest of World segment sales were $681 million.
13% as reported and increased by almost 10% on a constant basis.
The lower exposure to our commercial end markets, along with a larger presence in northern Europe supported strong topline growth in this segment.
Operating margin excluding charges was 19.3% that's a 480 basis points from 14.5% last year.
The main drivers were higher volume favorable productivity lower.
Lower <unk> and lower raw materials, partially offset by a favorable price mix.
In the corporate eliminations segment, the operating loss, excluding charges was $10 million.
We expect the total year to come in at a loss of about $40 million.
Jumping to the balance sheet.
Our receivables ended the quarter at $1.711 billion.
Our days sales outstanding improved to 56 from 61 days last year.
Our inventories ended the quarter to billion $842 million in dropped almost 500 million or 21% from last year as all businesses saw significant reductions in inventory with production lagging sales argument.
Our inventory days were at 100 versus 127 days last year.
Fixed assets at the end of the quarter were $4.405 billion and included capital expenditures during the quarter of $69 million and depreciation and amortization of 151 million.
We estimate the annual capital expenditures to be about 420 million with DNA estimated at 595 million.
And finally, the balance sheet and cash flow remains strong with total debt of 2.6 billion.
Total cash and short term investments of almost 1.2 billion and leverage at 1.1 times to adjusted EBITDA.
I'll now turn the call over to Chris to provide segment details of our third quarter performance, Chris. Thank you Frank.
For the quarter, our global ceramic segment sales increased 2% on a constant days and currency basis. Our operating income grew 11% with a margin of 10% excluding restructuring costs compared to last year.
All of our ceramic businesses improved substantially in the third quarter with low inventories limiting both our sales and service.
The residential sector experienced a more significant rebound in the period, while commercial demand remained sluggish most of our plants have stepped up to run all of their capacity to meet present demand and increased inventories in the fourth quarter.
Overall demand was solid but our visibility is hampered by cobot, the sustainability of residential sales growth and postpone commercial projects.
In the U.S., we're seeing increased traffic in our showrooms and galleries as well as our customers retail shops, we have shifted sales focus from commercial to pump construction, which is expected to increase through next year.
Commercial sales improved from the prior period, but are still lagging.
Our inventories decreased slightly during the quarter, even as we increased our production levels, we have announced price increases to cover higher freight and operations cost.
Our courts Countertop plant is performing as planned and we are increasing our higher style collections to improve our mix.
Our restructuring initiatives are being executed as we planned we have close to tile manufacturing facilities and consolidated distribution points. We've also reduced SGN, a and labor costs and discontinued lower performing products.
Our Mexican ceramic business is experiencing many of the same trends as the U.S. our plants in Mexico are operating near capacity to reduce order backlogs running shorter production quantities and optimizing our SK you offering.
To replace higher end import we're manufacturing new porcelain collections in larger sizes, we are expanding our sales footprint with exclusive dal tile branded shops being opened by our customers.
Our Brazilian ceramic business had its best quarter in its history with significant growth in both domestic and export markets. We are presently operating at full capacity and allocating production as consumer demand increase and inventories are rebalanced.
To offset rising inflation, we have announced a price increase that will go into effect later this year.
We're continuing our investments to upgrade our Brazilian assets.
Higher value products and reduce our cost.
Our European ceramic business delivered strong results in the period as residential sales improve and inventories in the channel are replenished.
Our performance was hindered by substantial reduction in higher value commercial category and lower exports for projects around the world.
We achieved higher manufacturing levels by reducing the traditional August shutdown periods.
Its production rose during the period, our service improve and we will continue to increase inventories to enhance their service.
Increased pricing pressures during the period were offset by higher volumes and productivity lower insides and SGN. They leverage our major markets in Europe are increasing restrictions due to recent spikes in koby cases, which could impact future demand.
Our Russian ceramic business recovered and is performing better than last year, even with the political crisis in the your Asian Union lowering our exports the growth was driven by our strong results in the new construction channel and company owned retail stores.
Like our other businesses low inventories constrained our sales in the period, our new sanitary Ware plant is operating as planned and will support our premium strategy with products that coordinate with other offerings.
During the quarter, our flooring North America segment sales decreased approximately 2% as reported with operating income margin exceeding 8% excluding restructuring charges the.
The segment's performance improved substantially from the prior period due to improving residential sales.
Revenue in the quarter were limited by our low inventory levels and difficulties increasing production due to staffing shortages and higher employee absentee rates.
Commercial demand improved from the prior period, but remains weak with the hospitality retail and office impacted the most.
Inventories in the period continued to fall, though we expect them to increase through the end of the year.
As our production aligned with demand our service levels are improving our restructuring programs are progressing and achieving the expected cost savings and manufacturing logistics and SGN Ed.
Our residential carpet business improved from the prior period with retail remodeling performing best our polyester products are outperforming other fiber categories, which is impacting our mix and average selling price as we progress through the period, we achieve higher manufacturing rates, which improved our productivity and cost.
Increased overtime in shorter runs improved our service, but raised our production cost decline.
To cover higher cost, we're implementing price increases in the market.
Our rug sales increased as consumers use them as an easy way to update their home decor in the period, we are allocating our rug production as demand increased and retailers restock their inventories.
Commercial flooring remains depressed as businesses reduce remodeling and postpone construction projects, while our commercial sales improved from the deep second quarter decline, we anticipate a slower recovery in the sector.
During that period laminate and had strong growth with expanding distribution and sales in all channels.
The beauty of our waterproof laminate collections are attracting more consumer interest.
And has enhanced our mix, even with our laminate operations running at full capacity, we are unable to satisfy demand and have postponed our new product introductions.
To increase our laminate production.
And provide new features we're installing a new line that should begin production in the fourth quarter of next year.
We have reduced our commodity wood manufacturing and a re purposing our operations to produce premium wood collections with unique features.
Sales of our residential L. B T collections continued to expand at a rapid pace with Richard products, increasing their share and our new product launches improving our mix.
To compensate for higher tariffs on source collections, we implemented price increases in the period.
We're continuing to make significant progress on our U.S. manufacturing facilities output is increasing although some of our productivity initiatives fell behind schedule due to covert related interruptions and travel from Europe.
We have recently relocated European engineers to the U.S. to implement enhanced LBC processes that are being used in our Belgian operations. Our sheet vinyl collections continue to take market share and our cost in the category improved due to greater efficiencies.
For the quarter, our flooring rest of World segment sales increased approximately 13% as reported the segment's operating income grew 56% with a margin of 19% as reported during.
During the period the segment outperformed and all of its geographies as home sales and remodeling expanded with people spending more time at home and reducing other discretionary spending.
Our inventories remain low in all product categories as order rates exceeded our increasing production levels.
To meet higher consumer demand our plants have less time off into August vacation period to maximize production levels and service.
With higher service and lower marketing expenditures, we leveraged our SGN a cost across the business. Our flooring rest of the World segment has less participation in commercial end markets that more negatively affected our other two segments.
Our laminate sales growth was limited by manufacturing capacity in Europe.
Began shipping laminate from Russia, just for a higher demand in Europe.
Our strong brands and industry, leading innovations continue to attract the consumer.
And our differentiated products are improving our mix, we postpone new product launches and reduced our marketing and promotional activities in the period.
During the quarter sales of our LDP collections grew the most as our production levels efficiencies and cost improved as we anticipated.
We expect our productivity and cost to continue improving as we expand the utilization of our operations and enhance our material yields and efficiencies.
The rigid L. B T categories also growing faster in Europe, and we will be adding a weekend shift to support the increased demand.
In the fourth quarter, we will begin shipping our next generation of rigid lbd products with new features that will strengthen our market position.
Our sheet vinyl provides the best flooring value in the market and our sales increased as our retail customers reopened higher production volumes positively impacted our cost and better leveraged our SGN a.
Russian sheet vinyl plant performed well with higher utilization and margins were adding another shift in the plant to satisfy or expanding business.
We completed the consolidation of our wood manufacturing operations in Malaysia, and significantly reduced our cost we have improved our output, allowing us to satisfy increasing demand.
We are gradually lowering our material costs through our initiatives to vertically integrate.
Our insulation products rebounded with increased volumes after our markets reopened.
Even though our selling prices have declined our margins remain strong as material costs were lower as well.
All material cost are now rising and we have announced price increases to comp.
Our board's business benefited from strong demand improved product mix and lower material prices. We also reduced our cost with the investments we made in expanding our global manufacturing and new energy plan.
Our Australia, and New Zealand business performed very well with strong sales growth improved product margins and the success of our updated product offering the.
The company is well positioned with a strong branding in both carpet and hard surface with.
With that I'll return the call to Jeff.
Thanks, Chris.
We entered the fourth quarter with improved sales and margin trends and have a solid order backlog across the enterprise residential remodeling and new home construction are forecasted to remain strong as the pandemic has transformed our living spaces into schools and offices and as participation and other activities has.
Following.
The fourth quarter slower for industry to the normal seasonality and we expect lower growth than that in channel inventory levels.
Our higher margin commercial channels will continue to be slow with completed projects likely to outpace new starts we.
We anticipate service improving with our inventories rising as production levels exceed sales were implementing our restructuring plans and on track to reduce cost as expected.
Our visibility continues to be limited by many uncertainties, including how government restrictions and demand will evolve assuming the current economic trends continue we anticipate our fourth quarter EPS to be $2.75 to $2 or 87 cents with a nonrecurring.
Current tax rate of approximately 5% for the period.
Our business has a rough responded effectively to the cobot crisis, changing government restrictions and varying market conditions residential remodeling and new construction are expected to improve next year. The commercial business should increase from its present low levels as economies recover going forward.
Our strong balance sheet cash generation liquidity will allow us to move from the defensive posture to a more aggressive growth strategy.
With that we'll be glad to take your questions.
Ladies and gentlemen at this time.
If you would like to ask a question. Please press star one on your telephone keypad management request that you limit yourself to one question and one follow up.
Your first question comes from Stephen Kim with Evercore ISI. Your line is open.
Yeah. Thanks, very much guys. Thanks for all the info and congrats on the good results.
I wanted to first ask a question regarding your share repurchase and your comments earlier about litigation the litigation.
Lot of questions, we've been getting from investors about if and when the company would step up in share repurchase activity, which you did address in today's release and Meanwhile, at the same time. There were there were there were some important changes it looks like to the language around the recent lawsuit in your press release I'm wondering is there any reason to think that there might be a risk.
Ladies and ship between the board's conclusion of its internal investigation and the boards authorization of the share buyback.
Hey, Good morning, Steve This is frank or that that is a good question and I'd like to make a couple of points I think about that.
First last quarter, we stated that the audit committee's investigation was substantially complete.
This quarter, we added to our statement that the investigation is complete.
And that the audit committee has concluded.
That the allegations are without merit.
I think the second point regarding the authorization the board's decision to authorize an additional $500 million for stock purchases.
Nearly an indication of their view of the value of our stock, but I also think it's an indication of the improved clarity on our position in the class action lawsuit.
Yeah, that's encouraging it makes sense.
Okay. Great. My next question relates to primarily flooring North America.
North American ceramic you indicated that you pause the restructuring as well I mean, it seems like there are two main reasons for pausing the restructuring.
One because demand surging and two because your inventories need to be rebuilt so what I'm trying to understand is how big of a factor the inventory rebuild is.
So, let's say resi demand stays as strong as it is now let's say just stays really strong when do you think your inventories would get back to a comfortable level that could be like do you think you can do it in Fourq, you, where do you think it's going to spill over into one Q of next year and once the inventories are in good shape and current demand if it stays the same.
And would you be happy with your present capacity or would you like we restart your restructuring program to reduce your capacity further in that situation.
What we said was we postpone some of it we actually reduced the cost of the restructuring by about $10 million and I think the.
Amount savings by the same $10 million.
At this point, we Havent concluded its only a limited portion of the total at this point we have a.
Our ready.
Executed about 25% of the savings through the third quarter as we said before we expect about 15 to.
$15 million to $20 million a period going forward on a continuous basis. So we haven't changed the strategy on restructuring and cutting costs out of the business that was just a limited portion of it.
On the inventories.
We're going to continue increasing the inventories between the fourth quarter and first quarter and it's all dependent on how we see the demand evolving in the business changing as we go through.
Well keep adjusting inventories up and down we expect to be in reasonable shape coming out of the first quarter.
For the rest of the year and in some cases, where we have capacity limitations, you will see us increasing inventories in the slower periods to take us through the peak periods in the.
Middle of the year.
Yeah that makes sense. Thanks, a lot Jeff appreciate it.
Your next question is from Tim watches with Baird. Your line is open.
Yeah, Hey, guys just want to echo nice job and.
In the quarter and the guidance here.
Maybe just in in my question two things. So the first is on residential for versus commercial is there any way to parse out how residential performance.
From a growth perspective versus commercial in North America.
And then maybe what the margin differential between the two business lines. This.
Let's just give you a higher level view of it the commercial business is somewhere about 20% to 25% of our total business in that we have parts.
Parts of the business that have very little and parts that have significant that most significant pieces are in us carpet use ceramic.
And our European ceramic have a much larger piece of the commercial businesses.
All the commercial businesses are down substantially.
Assisting projects are being completed and new ones are more limited coming forward.
Dissipating a slow recovery over time with next year being better but it is it could take multiple years to get back to where it was as we go through.
Okay is it fair to say further down.
The one other thing I would like to synthesizer too is with commercial.
Down as it is it is a much higher margin business than the residential side.
Okay. Okay.
And then I guess on LPT.
Is there any way to frame kind of where the Bridget LBC margins in Europe are today are.
Are they in line with other flooring product margins in Europe, and just trying to get a sense of the types of improvements that we've seen in Europe. Just just given it still seems like there is improvement opportunities in the North America business.
The Lv too.
In Europe.
Is operating much better.
It's positively contributing to our results the margins are not as high as the average of our business we have specific actions.
On a continuing basis to continue to lower the cost and we expect the productivity and cost to further improve.
In Europe, which is ahead of us were actually bring to market new innovative features to keep US ahead of the marketplace and they're going in the market now.
In the U.S. as we said, it's it's behind the other one bye.
Three to four months we.
We just recently brought.
Engineers over which we had trouble getting them to get in the United States, where we've had him here earlier.
And they're in the plants up updating the pieces to align with it.
I left out in Europe that we're actually we're in the process of adding a weekend shift.
Two it to fill the increasing demand on the rigid products over there and the us is falling behind in.
We think we're going to get to where we need to go.
Okay.
Okay, well well nice job on the results and good luck on the rest of you here.
Thanks.
Your next question is from Sam Darkatsh with Raymond James Your line is open.
Good morning, Jeff Frank Chris how are you.
Perfect Good morning.
Terrific two quick questions, if I might on the fourth quarter.
Specifically it looks like your guidance implies a far more my old man.
Margin expansion year on year in the fourth quarter than what you saw in the third quarter.
I'm trying to figure out beyond the conservative see why that might be the case, knowing that you're getting incremental pricing that your production is going to be higher than you have restructuring savings coming in.
Why might we not see as much of a margin expansion in the fourth quarter as we did in the third.
In the third quarter.
Paired to the last year we.
We had our European businesses ran a lot of the capacity through the vacation period. So our cost structures were lower and on a relative basis to each other as we go through this.
At the same time in the third quarter, we cut back on a huge amount of our marketing activities and our costs up with where the capacity is where they are and we're going to have to take normal lives the marketing expenses and pieces in the fourth quarter going forward.
On a forward basis, when you look at the the sales it looks like residential will continue to be good but you listening to all the things about cope with were not sure what's going to happen with Covidien, how it's going to impact our business so far with the European businesses.
It appears that our customers are going to stay open and they're considered essential but I mean, it's changing by the day. So that's.
That's good at the moment, but we can't tell what's going to happen.
Our commercial businesses, we really don't know if they bottomed yet or not you have the old pro old.
All things projects were put in place are coming to completion and they're completing the new ones are slower coming up and it's really hard to determine how they're going to all balance out together as we go through the fourth quarter. So in our estimate we're trying to to reflect all of those considerations.
Helpful. Second second question, if I might Frank back of the envelope.
I'm getting.
Fourth quarter free cash flow somewhere in the breakeven does somewhat positive area I guess, depending on the inventory ramp is that a fair representation of how you see free cash flow in the quarter.
Yeah, I think it's going to be in that range.
Okay. Thank you all be well stay safe have a terrific weekend. Thanks.
Your next question is from Mike Dahl with RBC capital markets line is open.
Hi, Thanks for taking my questions on the details so far.
Two questions on flooring North America specifically.
First I am curious if it's possible for Threeq you you went through a lot of moving pieces and talked about.
I'm still seeing the strength and LPT, which obviously consistent with the market. Your overall flooring North America sales were down 2%, excluding LPT what was for what we're for North America sales.
We don't give out the information at that level I can tell you that.
Our sales.
We're limited in all the product categories by our capacities and production levels.
With the $500 million of inventories have been taken out of the whole business.
We usually go into the third quarter with higher inventories reduce on.
So all the categories. The sales were limited by that in the.
In the carpet one specifically.
With the whole industry in the same area the.
Oh industry picked up the whole industry had left the workforce decline because nobody can see where it is so there is a huge pressure on the workforce and getting his staff back up and then the training and hiring and impacted significantly so that the business in flooring North America had more.
Restrictions on it than many of the other businesses.
Our along.
A long way down where we'd like to be but we're still having training absenteeism Cove. It you know still impacts are.
We're protecting the people inside the business, but when they come in with it. We then have to let people go home and the absenteeism goes up so protecting all the people is impacting our ability to raise the production rates as high as we would have liked to have them.
And I would just add to Mike that the.
The single biggest headwind we had on sales in flooring North America was commercial as Jeff talked about before.
And on the margins yeah.
Right. Okay. Thanks, Thats helpful and that kind of ties into my next question just given the headwinds that you're you're still seeing in commercial and hopefully those are bottoming, but with.
With the puts and takes there.
Within your fourth quarter Guide do you anticipate for North America sales to be.
Positive or still under pressure.
We're expecting more of the same.
Okay. Thank you.
Your next question is from Keith Hughes with trade Securities. Your line is open.
Thank you two questions one back to the flooring North America.
Look at your LPG growth.
In the segment.
You think you're at a point now where you're growing aftermarket.
Been underperforming for a while.
I think that we're growing with the market.
The numbers are really hard to get five because the numbers are based on the.
The imports and the imports have been similar Radek you cannot and then we have the same thing in ceramic you can't take the imported volumes and assume that reflects whats going on in the marketplace. So it's really hard to estimate the sales at this point both for anything that's important.
That was my second question. The important numbers are radically, particularly high too do you think that indicates LTT ramp in its growth back up from some limited growth.
2019 or is there just some inventory build ahead of this pricing grids.
It's hard to tell.
One is the base continues to get bigger the growth rate is not going to grow at the same rate. It has been in the growth rate is going to slow.
And.
I think it's still going to grow but just at a lower growth rate.
Okay Second question third question I guess.
Within our price mix in ceramic you called out the negative and the.
In the discussion and it's been negative for some time with some of this reemergence of residential growth and some pricing you talked about is that is that something that could flip to the positive than that in the near term.
Well Keith.
Keith typically residential pricing would be less than commercial pricing.
So I wouldn't expect help on a pricing.
Secondly, so far with the imports coming in the pricing has been under pressure on those two.
So I don't wouldn't expect a whole lot of help from pricing, we are taking a price increase to offset tranche.
Transportation and other cost, but generally I don't I don't the shift to residential is going to help us.
The countries, where the important ceramics coming from most of the countries their exchange rates have weakened.
In the past six months, which isn't helping things.
Okay. Thank you.
Yes.
Your next question is from Eric Bosshard with Cleveland Research. Your line is open.
Thank you.
The the U.S. tile business.
The conversation you guys had I'd love to get a little bit more sense of.
Where this goes from here and specifically with.
Less commercial volume it seems like that would create some excess capacity in the industry, what's going on with currency seems like it could create a more aggressive pricing environment.
And I understand your need to take price to offset costs, but.
As we look forward for the next six or nine months it seems like it could be a more competitive environment for.
For pricing for share.
Am I missing something or am I looking at this wrong in the U.S. tile business.
Well I think the tile business is going to remain competitive in the United States.
As you May already know we have implemented restructuring initiatives.
That are being executed as planned in North America, we closed two manufacturing facilities and consolidated distribution points.
And we've reduced SGN a manufacturing.
And also lower performing products. So I think we will be in a.
Environment, where pricing is competitive, but we are reducing our cost at the same time.
Okay.
Oh I see.
Others, I guess, just a follow on within that's our the rest of the industry putting through.
Price increases as well or what's the trend across the industry in terms of pricing.
Really we don't know at this point all we can we do know that the average price of imports have declined.
And that we have it recently implemented are in the process of implementing a price increase but we don't know yet about the other competitors does the price increase is basically focused on the freight.
If you look around the country. The freight rates are going up dramatically the transportation systems are tight.
And so all the cost of everybody who's moving anything are going to go up not only us.
Okay. That's helpful. Thank you.
Your next question is from filming with Jefferies. Your line is open.
Hey, good morning, everyone. Congrats on a solid quarter.
Outside of the commercial piece.
In the U.S. your international business seem to have stepped back much faster versus U.S.. So just trying to get a better sense.
It sounds like that's partly due to labor and maybe just lack of inventories should you should we expect that.
Catch up dynamic playing out the next few quarters as your operations improve here.
The question.
Give me that I'm not sure we heard the question real well on our end. So can you go through go through one more time, please yes should we.
Yeah, no problem it sounds like it looks like your your results international did much better than us.
Just trying to understand why international saw a quicker snap back it sounds like it's partly due to labor inventories.
Lack of that in the U.S. can you.
Expand on that and do you expect that catch up dynamic to play out as well in the U.S. next few quarters.
The first part of it is.
That the.
Regions that they end the majority of our businesses are in northern Europe, which perform better.
Second is they have a much higher percentage of residential sales. So they didnt have the same impact on the commercial volume and commercial margins and a commercial margins in our businesses are higher than our residential businesses. So they also suffer.
At the same time, we had the L.D.T. performance over there is better we have a new plant in Russia that turn profitable and is doing well, we're increasing the shifts in both LDC and sheet vinyl there to satisfy demand.
And then we also had the occurrence in our Australian business that the Australian business also performed really well and we think a lot of it's because of pent up demand and we were better position than our competitors in the marketplace.
Got it that's helpful. Jeff and then from a Lv T. standpoint in the U.S. any way to help us understand or give us some more mark to look at going forward in terms of where you are in in terms of the evolution of being profitable any color on where your compassion visitation levels are for a for the U.S.U.S. line.
And where are you with data evolution on improving your mix.
We think we're about three to four maybe five months behind the European one European businesses are all profitable.
And so the reason, we're bringing over the people is to catch up.
Mission in Europe, they're one step ahead of us with new products and innovation to the marketplace. So their mix is a little higher which we'll be introducing here as we catch up to them.
Okay should we expect you getting closer to a profitable early next year is if you kind of close out three to four month gap.
I think so.
Okay. Thanks, a lot appreciate the color.
Your next question is from Kathryn Thompson with Thompson Research Group. Your line is open.
Hi, Thank you for taking my questions today.
So our understanding from an industry standpoint, it needs to North American business that the time off around Thanksgiving and Christmas holidays. This year.
Is shorter than it's been in previous years.
Could you discuss how you're approaching time off around this two holidays this year compare.
Against what was happening last year and final point with that give included and different ways. You have to operate also discuss how you approach potential multiple shifts thank.
Thank you.
So first the holidays fall on different timeframe. So one as it could have a positive impact on the volume due to the timing on.
On the business shifts.
And the closure of the holiday.
They're all around the the inventories and service levels that are required we can increase or decrease them within some limits.
Based on the business volume.
And get volunteers to work through some of the holidays if they.
Usually there is a group that can so if we need more capacity in our projections, we can increase the utilization of the plants and keep running them to raise inventories. If we think we need to.
Well, maybe more directly are you taking less time off this year around the holidays versus last year.
Well to tell you the truth, we don't know how demand is going to be over the next two months with Kols and so we're leaving everything flexible because we have no idea, what's going to happen to the volume at this minute and were working almost week to week trying to anticipate what's happening, but we don't know.
Our governments are going to restrict us more or not restrict us more and we don't know what how the consumer is going to react so were producing as necessary.
The other the other side of that too is a as we've said several times in our inventories are below where they need to be and we're running production as hard as we can to try to get caught up but.
We're looking at it now all the way through the first quarter.
The pieces and trying to see how the thing works and at the same time, we're trying to estimate next year's requirements, which is really hard to do.
Yes that totally appreciate that and obviously in all else equal if you were able to do that this year.
Against that backdrop, assuming that you continue.
Is it your assumption based on if demand remains as it is right now with your current production levels.
To be clear do you believe you'll be able to meet sufficient.
By the end of Q1 with current production levels or is it the type of thing that would acquire a longer time period to catch up.
No we're going to we're going to catch up.
By the end of the year the demand pieces, we believe but the inventories as the question what level will they get to on where they are and it's all dependent on how strong the demand is through November and December relative to our production rates.
Were not sure normally seasonally it falls off and our <unk>, we're expecting our inventories to go up in both the fourth quarter and the first quarter as it to get them to where we want to be there for next year and then we're going to keep adjusting the strategy based on how we see the consumers reacting and coated.
Okay, great. Thank you very much.
Your next question is from Susan Maklari with Goldman Sachs. Your line is open.
Thank you good morning, everyone and congratulations on a good quarter.
Hi, My first question is going back to Europe can you talk a little bit about some of the shutdowns that were starting to see go into effect in some of those countries and how you're thinking about any differences there relative to what we saw back in in the spring in March and April and May be.
How you could react differently this time around relative to back then.
To begin with is too early for us to feel at this point the cases have gone up but it really hasn't we haven't seen any impact in either our demand relative to the new changes or two limitations are putting on us at the moment they are limiting more social.
Activities and limiting what time people go to bed.
How they go out at night, they're limiting bars and restaurants, and so up to this point.
We haven't seen it so we're going to have to see to that how restricted to they get and what if any impact is going to have arms. We went through this last time to Susan with the definition of essential businesses. Both in the U.S. and over in Europe, you know back in March April and May.
And we're going through the same exercise now, but so far were considered to be essential businesses.
Okay. All right. That's helpful. Thank you and then my next question is you mentioned that you are starting to see some inflation. Obviously in your input costs can you give us some idea of the magnitude of that inflation and how we should be thinking about it as we get into next year.
It's different by product by category I think as we ran through the earlier description.
What you heard was we were raising prices in a number of categories I'll try to run through some of them use ceramic mostly based on freight Brazilian ceramic U.S. carpet USL BT European sheet with final and Lv T. with final cost going up.
And European installation with the raw materials, there so all those are and and and.
The process of being enacted.
The oil prices are really difficult to predict so how they are going to react and where they're going to go we're going to have to follow them.
There is also the supply and demand that the various places in between so in vinyl in Europe, Theres, a really tight supply of it. So the prices are going up so it's really hard to predict how all the supply and demands are going to work out and we're reacting as appropriate.
Okay. Thank you good luck.
Your next question comes from John Lovallo with Bank of America. Your line is open.
Hey, guys. Thank you for fit me in here maybe.
Maybe starting Frank with SGN a.
On a dollar basis in the second quarter. It was down year over year I'm, just curious the sustainability of that given some of the cost containment and productivity efforts on one side and then the increased marketing marketing expense hiring et cetera on the other side, we should we see that begin to increase on a year over year basis, the dollar amount of EPS.
Okay.
I am right now as Jeff said that we did pull back in the third quarter on marketing expenses and we have to begin to normalize that in the fourth quarter.
We continue to see benefits from our restructuring plans as well, which will help lower that cost.
Okay.
And then maybe just on global ceramic.
You guys mentioned.
Shifting sales focus towards residential just curious what you know.
That actually involves I mean is that simply repositioning people are hiring new people or is it just the dosing here look we need you guys to focus more on this part of the business, maybe you could just walk us through that.
Well, what's happened in as the commercial slowed down we've taken resources out of that business and at the same time, we've added resources in the residential business both on the remodeling and the new construction.
The and I think that residential business looks like it's got some legs on it for you.
You know several months into Nick next year, and maybe beyond coming.
Commercial we think will come back but for right now there's not been a whole lot of projects started and so weve a pull back in that area.
Thanks, guys. Thank you.
Your next question is from Matthew Bouley with Barclays. Your line is open.
Hey, Thank you for taking the questions. The the rest of world margin of 19% can you maybe unpack a little bit what drove that margin strength and I guess you know to what degree was that helped by I think you mentioned producing a little more during August.
The vacation period than you typically do just trying to understand what the profitability of that business should look like on a more normalized basis like well I can take that in Q3, our volume was higher as the economy rebounded in all areas, we had higher productivity with volume and we as you mentioned we had lower they.
Occasion stops.
We had lower material cost, but that was offset by price mix.
Lv T. and Russian sheet improve performance.
In Australia, and New Zealand, we were better due to the increased volume from deferred purchases.
Q4 will be lower margins due to seasonality higher cost and additional marketing investment.
Got it. Thank you for that second one is the language you mentioned around pivoting more aggressive growth.
I guess in light of the improving balance sheet could you discuss kinda.
If there had been any areas that you felt constrained on from an investment perspective, and kind of what's on the I guess the wish list.
I think it's you have to back up a little in the last six months I mean, all all focus has been on surviving an unknown future and trying to manage day to day changing the strategy is almost week to week and so anything about future investments will put on hold any looking at.
Acquisitions was was put away. So we've gone through this period and we Didnt know what the demand and cash flows we are going to be like so at this point, we're getting comfortable that the business has improved significantly and we have to go back and start.
Looking at alternatives in pieces and today, we still have a constriction on on capital expenses were post slowly postpone things that we think are good projects and we have to decide what next year is going to look like and how aggressively to approach it.
And then where are we starting to this point looking at alternatives to grow the business go into new product categories and potential acquisitions, but we're just starting to.
Do that as the business has started to normalize.
Got it thanks for the details.
Your next question is from Michael Rehaut with JP Morgan Your line is open.
Thanks.
Good morning, everyone and or I guess right now it's the afternoon congrats on the results.
First I just wanted to get a sense of possible you mentioned inventory bill.
Build during the third quarter and just wanted to get a sense for.
What that contributed to the overall sales growth and if there were any segments, where there were you know larger.
Where contributed more than others.
The question, a third quarter or the fourth quarter.
Oh, well yeah, both if I can be so bold pad I I will settle for what what the contribution was in the third quarter. If you could give me on a relative basis I know that you said for Fourq, you will be less of a growth from less of a contribution from inventory growth, but just love to hear your thoughts.
It's on again, what what what roughly was the percent.
Sales growth contribution from from the inventory restocking.
Mike I think the first the first is in the third quarter the inventories the whole business actually went down $80 million.
So the inventories declined in the third quarter, even with all our efforts now as we went through the period the inventories the the production rates increase as we went through the period.
And with that we still have a lot of cost with training people absenteeism Cove it across the different businesses. So we expect those things to get better going forward, but as the cases in the communities go up we'll have to see what happens.
And maybe just to make sure we understood your quite yet.
I'm not referring to the inventory decline at your own business, what I was referring to and maybe I'm misunderstanding it but what I thought you had said in the prepared remarks was that.
In the sales into the channel there was some inventory restocking by your customers.
As demand rebounded as well in it and so if that was the case not what your own inventory balances did.
But what the sales into the channel did.
You know if you have any sense of what.
Contribution to sales growth.
The inventory restocking by by the customers was.
We don't have perfect use into it we know that coming out of the second quarter, just like the rest of us that they also reduced their inventories not knowing what was going to happen and they came into the.
Third period with low inventories the sales improved in most of them.
And so they tried to increase the one is I tried to satisfy the demand and I've tried to get some of the inventories up in their own places. We think there's still low in most of the channel, but we're not sure because we have very poor views of whats going on through it as it we know that and spin.
Terrific instances with some large customers. We know we have not been able to supply them. The volume they wanted to increase their inventories and we think there's going to be in those parts. Some inventory increased now when we can't tell us because we don't have the view is what's going to happen which is why.
Another piece in the demand, which were uncomfortable with we can't tell if some of it was the increase inventories and that they will reduce the orders as we get further in the period because they they.
It won't help them if that doesn't get there in time so.
So theres a lot of moving parts in this thing that we really don't have good views.
No I appreciate that thank you, Jeff I guess, secondly, just going back to the share repurchase plan for a moment.
Just want to understand and yes, it's that's more of just a general authorization.
Can be you know.
Implemented over time or is this you know it sounds it's slightly different in terms of the language that this is somebody that maybe would be happening more immediately and over a shorter time period, and if and if that's the case you know, perhaps what type of time period are you looking at.
Well, it's a general authorization I think you had that was one of the descriptions you use this as a general authorization for us to increase the amount of shares we can buy buy up to another $500 million. So.
So this is going to allow us to invest.
In our stock because we believe it's a good value going forward and so we'll continue to look at.
Current investment alternatives, including disciplined capital expenditures and acquisitions, just like we said earlier.
Okay, great. Thank you.
I would now like to turn the call back over to Mr.
For closing remarks.
We're responding to the coal that crisis is required as you can tell our forward visibility is poor and we're going to have to keep reacting to it.
Actions that we've been taking should improve our results next year, both in cutting cost improving our sales the commercial businesses. We expect next year to continue to improve.
And our balance sheet is strong enough to support moving to a more aggressive growth strategy. We appreciate the time, you've taken to be with us. Thank you very much.
This concludes today's conference you may now disconnect.
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