Q4 2020 Mohawk Industries Inc Earnings Call
Yeah.
Ladies and gentlemen, thank you for standing by and welcome to the Mohawk Industries fourth quarter 2020 conference call. At this time all participant lines are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During the session you will need to press Star then the number.
One on your telephone keypad. Please be advised that today's conference is being recorded today February 12, 2021, if you require operator assistance Press Star then zero I would now like to hand, the conference over to Mr. Frank Boykin. Please go ahead Sir.
Thank you Holly good morning, everyone and welcome to Mohawk Industries quarterly Investor Conference call Today, we'll update you on the company's fourth quarter results on.
I'd like to remind everyone that our press releases.
We may 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 on our hernia periodic filings with the Securities and Exchange Commission.
This call May include discussion of non-GAAP numbers for a reconciliation of any non-GAAP to GAAP on that.
Please refer to our form 8-K and press release in the investors section of our website.
Jim Brown for his joining Jeff Chris and me on todays call, Jeff has been our corporate controller since 2009, and it was recently announced as my successor.
He will officially assume responsibility as Mohawk CFO effective April one and will be.
We will be providing our financial results on today's call I'll now turn the call over to Jeff for his opening remarks, Jeff. Thank you Frank for.
First I want to congratulate Jim on his new position I've worked with him for more than 10 years and look forward to jump further enhancing our business strategies and results in his new role.
We had a very strong first quarter and delivered record sales of $2 $6 billion, an increase of 9% as reported with adjusted operating earnings and EPS of $305 million and $3 50 for the.
The business was stronger than we had anticipated with residential markets outperforming around the globe, our free cash flow for the fourth quarter was about $248 million after capital investments of $160 million.
For the year, we generated record cash flow of more than one 3 billion.
In the first half of last year, our industry was under enormous stress as the pandemic spread and we responded to the disruption by minimizing costs lowering inventory levels, initiating restructuring actions and reinforcing our liquidity.
In the second half the residential flooring demand recovered significantly faster than expected as people spent more time at home.
Meanwhile, commercial flooring demand remains depressed due to business investments being postponed or canceled or.
Our inventory levels decreased in the second and third periods as sales strengthens and production was limited by capacity workforce absenteeism and labor shortages.
SG&A investments from promotional activities were curtailed during the year to improve on margins. The pandemic created substantial differences between our segments due to varying restrictions stimulus consumer responses on our ability to raise production levels.
Our revenues and operating income rebounded and surpassed the prior year for both the fourth quarter and the second half.
Our fourth quarter results exceeded our expectations as we posted our highest ever quarterly sales, even with increasing COVID-19 cases around the world.
All of our markets saw strengthening residential purchases with laminate L V T and sheet vinyl outperforming other flooring categories.
Our residential performance was partially offset by a weak commercial market in the regions, where we have more significant business in that channel.
Our results were improved by higher volumes restructuring and greater leverage on cost while being adversely affected by lower production runs and inventory absenteeism and labor shortages in some operations.
We're also seeing greater inflationary pressures in many product categories, and we are increasing prices to recover.
Our flooring rest of the World segment continued to outperform with significant sales growth higher operating leverage and improved productivity.
The segment delivered further improvements in LPT production on cost, which enhanced our performance in the period.
Our global ceramic and flooring North America segment has also improved although both experienced a greater impact from commercial headwinds.
Through the fourth quarter, we achieved about $50 million of the projected $100 million to $110 million and anticipated savings from our restructuring initiatives.
We continue to assess some projects based on changing market conditions.
After paying off our short term debt and pre funding of longer term maturities in the second quarter, our net debt leverage is at a historical low.
Our strong financial position gives us flexibility to pursue additional opportunities, including internal investments acquisitions and stock purchases.
Since the third quarter, we've acquired approximately 1 million shares of our stock for $130 million as part of our share repurchase plan.
Since the pandemic began our organization has been protecting one another and supporting our customers around the world. We are mitigating the spread of Covid utilizing best practices, while testing and tracking employees with potential contacts.
I'll now turn the call over to Jim Thank.
Thank you, Jeff I would like to add that I'm honored and excited about the opportunity to lead Mohawk very talented global finance team.
Now, let's review our financial performance for Q4 2020.
Sales exceeded $2 $6 billion for the quarter, a 9% increase as reported or five 5% on a constant basis with our flooring rest of world segment outperforming.
Q4 had two additional shipping days in most businesses and as you consider 2021 financial projections. Please remember just taken accounts following items.
Across most of our businesses Q1 has three additional days from approximately 5% more in Q4 has for fewer days or approximately 6% less compared to prior year.
This year sales should continue higher growth and full year operating margin should improve our Q2 comps for very low in the second half comps for more difficult with the rebound that occurred last year.
Also last year in Q3, and Q4, there was less time off for holidays for our customers and us time off should be greater this year now coming back to the P&L gross margin was 27, 9% as reported for 28, 8% excluding charges increasing hunter.
20 basis points from 27, 6% in the prior year.
The year over year increase was driven primarily by higher volume of $51 million.
Our activity of $50 million and lower inflation of $21 million, partially offset by price mix of $30 million SG&A as reported was 17, 2% for 17, 3% versus 19, 1% in the prior year, both excluding charges.
The lower SG&A percent was driven by improved leverage on increased volume and stronger productivity of $21 million.
Operating income as reported was 10, 7%.
Restructuring charges for the quarter were $22 million and our restructuring initiatives are on track with year to date savings accounted for approximately $50 million of our announced $100 million to $110 million plan.
Operating margin, excluding charges $305 million for 11, 6% improving from eight 4% last year or 320 basis points. This increase was driven by productivity of $71 million stronger volume of $42 million and reduce inflation of 12.
Million dollars, partially offset by the previously noted unfavorable price mix of $30 million.
Interest expense of $16 million, including the impact of our new 2020 bond offerings, and we expect Q1 to be approximately 16% to 16 and a half million dollars. Other income of $7 million driven by favorable transactional FX and short term investment returns are.
Our Q4 non cash non-GAAP tax rate at 14, 8% versus 18, 9% in the prior year benefiting in part from the U S. Cares Act, we expect Q1 2021 to be approximately 21%.
Earnings per share as reported of $3.49 or excluding charges of $3 50 for.
Growing 57%.
Year over a year now.
Now turning to the segments global ceramic sales of $920 million, a 7% increase as reported with the business up 6% on a constant basis with growth across all geographies, the largest increase being in Brazil and Russia.
Operating income excluding charges of $88 million at nine 5% return, that's up 65% or 330 basis points versus prior year.
The increase was from productivity of $28 million volume of $16 million and lower shutdown expense of $4 million, partially offset by unfavorable price mix of $12 million and unfavorable FX of $4 million.
Flooring, North America sales of $963 million.
Or 3% increase as reported for flat on a constant basis led by strength in our residential focused products offset by the weakness in the commercial channel.
Operating income excluding charges of $91 million for nine 5%, that's an increase of 27% or 180 basis points compared to prior year.
This increase was driven by higher productivity of $26 million lower inflation of $7 million and increased volume of $3 million, partially offset by price mix of $18 million in flooring rest of the world with sales of $759 million, a 20% increase as.
<unk> or 13% on a constant basis, driven by our resilient laminate and panels businesses in Europe, and our carpet business in Australia, and New Zealand.
Operating income excluding charges of $138 million for 18, 2% up 420 basis points or 57% versus prior year.
The main drivers for the higher volume of $23 million improved productivity of $16 million and lower inflation of $8 million, partially offset by unfavorable FX of approximately $4 million Corp.
Corporate and eliminations came in at $12 million and you would expect 'twenty and 'twenty one to be approximately $40 million.
Turning to the balance sheet cash.
Cash and short term investments increased over $1 $3 billion, driven by the Q4 free cash flow of $248 million, bringing the full year 2020 full year full year cash flow free cash flow to approximately $1 $3 billion.
Receivables were just over $1 $7 billion with DSO, improving to 59 days versus the prior year 62 days.
Inventories just over $1 $9 billion dropped to almost $400 million for 16% from prior year with a marginal sequential increase of approximately $30 million adjusting for FX from Q3 inventory days are at 103 days.
134 days in the prior year.
Property plant and equipment at just under $4 $6 billion with Capex of $116 million for the quarter in line with our DNA and full year Capex was $426 million with DNA of just over $600 million, we estimate that 2021 annual capex.
To be in line with our DNA of approximately $590 million.
And lastly, the balance sheet and cash flow remained very strong with gross debt of just over $2 7 billion total cash and short term investments as previously noted over one 3 billion, leading us to a leverage of one times adjusted EBITDA.
And with that I'll turn the call over to Chris who will provide details on our fourth quarter performance.
Thank you Jim.
Sales for our flooring rest of World segment increased 20% in the period as reported or 13% on a constant basis significantly exceeding our forecast.
Margins expanded over last year to 17, 5% as reported or 18, 2%, excluding restructuring charges due to higher volume and positive leverage on SG&A and operations, partially offset by currency headwinds.
Sales and margins were strong in most categories and geographies with most of our plants operating near capacity in the fourth quarter raw material costs began to rise and many of our product categories and we're taking pricing actions to respond to the increases.
Laminate, the segment's largest flooring category delivered significant growth in the period.
Across most of our markets our margins increased as higher volumes drove greater absorption of manufacturing and SG&A costs, while increased productivity and better throughput enhance their results.
We continue to focus on our premium collections that feature superior visuals and waterproof technology.
Our service levels showed improvement during the period, though they remain below our standards to satisfy higher demand for existing products. We chose to postpone introductions of our next generation laminate collections in most markets.
<unk> sales increased substantially in the quarter led by accelerated growth of our rigid collections, both our L. B T margins and profitability improved due to increased volume lower production costs and SG&A absorption.
We have increased staffing to operate all L. V. T line seven days per week, we're introducing new collections with enhanced visuals and exclusive watertight joints that better prevent water damage.
We are implementing price increases in our L V to collections to compensate for rising material costs.
Our sheet vinyl business rebounded as our retailers reopen their shops and their export markets picked up our plants ran at high production levels that reduced our operating cost, though unfavorable currency partially offset.
All of our European sheet vinyl plants were running near capacity and we've announced price increases are greenfield Russian sheet vinyl plants volume has grown to a level that it's margins are in line with our other businesses.
We have completed the consolidation of our wood operations in Malaysia. During the period, our production was impacted by equipment installation and transportation challenges due to COVID-19.
The equipment from our closed European plant has now been installed and we are improving our throughput and wood sourcing strategies.
Our wood panels performed well in the period with sales limited by our capacity and low inventories are productivity improved in the quarter, increasing our volume and throughput day.
Man for our customized mezzanine floors is growing as greater E. Commerce sales have increased the need for warehouse space.
To cover rising material cost for wood panels, we're also implementing price increases.
Product mix continues to improve due to a higher share of stylized products due to sales investments to increase project specifications.
We're expanding our capacity and melamine products to further improve our margins.
And installation volume was good though our margins were impacted by significant material inflation due to supply constraints, we have implemented a price increase and have announced another to keep pace with the rising costs demand for the category remained strong enhanced by government incentives for energy savings.
Sales in Australia, and New Zealand were strong in the fourth quarter and margins improve with higher volume and lower material cost from our longer supply chain.
We enhanced our market position with more aggressive sales initiatives and by providing a more consistent service under difficult circumstances, we have leveraged our relationship with carpet retailers to expand sales of our hard surface products.
Our results are benefiting from upgrades to our carpet and hard surface offering.
Manufacturing assets and distribution capabilities that we've implemented since we acquired Godfrey Hirst.
For the quarter, our global ceramic segment sales rose, 7% as reported with improved results across the world led by growth in the residential channel from heightened remodeling and home sales.
Operating margins for this segment expanded to eight 7% as reported or nine 5%, excluding restructuring costs due to higher volume and improved productivity somewhat reduced by commercial product mix and currency.
Our Brazilian and Mexican businesses delivered record quarterly sales and expanded margins, even with inflationary headwinds manufacturing constraints and low inventories limited growth in most of our regions material energy and transportation costs are rising and we are increasing prices in most markets to offset.
These pressures.
Our U S ceramic business delivered strong residential sales growth, while commercial remained challenged as businesses defer investments. Our service centers are experiencing improved customer traffic due to higher home sales and remodeling activity.
The home center channel outperformed with increased demand and inventory replenishment.
To provide additional features and benefits we are expanding our higher value collections with high gouache polished tiles anti microbial treatments and matching floor and wall combinations.
We have announced price increases across most of our collections to pass through higher transportation costs for ceramic plant productivity and cost improved during the period due to higher volumes and continued process improvements on our restructuring initiatives are progressing and we should complete our ceramic plant consolidations by the end of the first quarter.
Our countertop business is increasing substantially with sales of our quartz products growing significantly our quartz countertop production cost and margins continued to improve our results and we are increasing our mix with higher value stylized products.
Our Mexican ceramic business delivered its best quarterly sales performance, even with capacity constraints, our margins improve with higher productivity, partially reduced by inflation and product mix.
Our inventories declined and our backlog remains high as we ended the period our customers have opened 30 exclusive dal tile stores in the country, which will enhance our sales and strengthen our brand.
To cover rising inflation, we've announced price increases.
Brazil also delivered record sales in the period with all channels performing well our margins improved due to increased volume and productivity, partially offset by inflation and product mix.
Brazilian plants are operating at capacity and have been allocating production to customers. Our backlog remains high and we are increasing price to recover inflation.
We're investing to further upgrade our manufacturing assets this year.
Yes.
For the quarter, our European ceramic sales and profitability were above last year.
Southern European economies were more affected by Covid and have remained softer than other regions. Our residential sales were stronger with more competitive pricing and lower commercial sales negatively impacting our product mix and margins.
We are launching differentiated collections to improve our mix with small sizes large porcelain slabs outdoor products and enhanced design technology in the period, our service levels improved with the plants operating at higher rates, though inventories remain low due to higher demand.
Our Russian ceramic business delivered strong results during the period, even with inflation and currency headwinds sales rose significantly in all channels led by new residential construction, which benefited from historically low interest rates to meet higher demand. We ran more production by limiting holiday shutdowns were.
<unk> fully ramping up our new premium sanitary ware manufacturing and we'll expand it further this year.
Sanitary ware complements our ceramic tile collections and will enhance our product offering and our owned and franchise stores.
For the period are for.
North America sales increased 3% as reported and our adjusted margins expanded eight 6% as reported or nine 5% excluding restructuring costs.
We had strong growth in the residential channel offset by lower commercial which improved from a slow based on prior periods. Our service levels have improved as we increased production in the period.
So high demand required allocating some products due to higher demand and COVID-19 disruption in our plants, our inventories did not grow as we anticipate it to.
To improve our margin and mix, we're launching many innovative products that address the needs of families spending more time at home.
We are taking pricing action in most products due to rising material labor and transportation costs.
We have executed a large part of our restructuring initiatives, which is benefiting our results with some of the savings flowing flowing through inventory in future periods.
Some of our operations were inhibited by increased absenteeism and labor shortages due to Covid and we anticipate higher production levels will improve our service and our inventory positions.
Our residential carpet sales grew during the period as comfort and noise reduction have become more important to consumers the.
The demand for residential carpet is strong and our sales momentum should be solid.
We have taken many actions to improve our productivity, including rationalizing our product offering and reducing our operational complexities our restructuring actions have lowered our overhead and improved our cost and yields our new carpet collections will provide improved margins, while offering superior styling features and value.
We're introducing smart strength collections with our new patented hypo allergenic backing making installation faster and recycling easier, we're adding new pattern technologies and expanding our unique continuum polyester collections made from recycled bottles, we've announced price increases due to increasing inflation in materials.
Labor and transportation.
Our commercial business has improved from its bottom, but remains depressed along with their retail hospitality office and aviation sectors. Our commercial hard surface sales are outperforming carpet and we have improved our online tools to make it easier for designers to select and customize our products we're managing.
Our cost structures, which have been deleveraged by lower volume and we have announced price increases across our product offering.
Our laminate business is growing substantially in all channels as our unique visuals and waterproof technology have become desirable alternatives to both natural wood and L. V. T. Our plants are running at capacity to meet the exceptional demand and we're supplementing domestic production with laminate sourced from our worldwide operations.
We are excuse it executed numerous process enhancements to increase our laminate.
And board production and by the end of the year on new line should be operational with additional capabilities.
We announced a price increase on our laminate collections because of rising cost.
We have repurposed our plant in Virginia to manufacturer of premium Wood flooring collection that has been in development for for years applying our exclusive technologies, we created a truly waterproof wood flooring with dramatically improved scratch dent in wear resistant for today's active households, we've also updated on.
Other wood collections to align with evolving market trends.
Sales of both our L. B T on sheet vinyl improved substantially during the period supported by strength in new housing starts and residential remodeling.
We have multiple engineers from our European business working in our U S operations to implement demonstrated improvements to increase output reduce material costs and enhanced product visuals and performance.
We're introducing updated residential and commercial products with our new water technical technology that will improve our mix and margins as another categories, we've announced price increases due to rising material and transportation costs.
With that I'll return the call to Jeff.
Thanks, Chris our fourth quarter sales on operating performance for much.
Stronger than we anticipated.
We ran our plants around the world at high levels during the period.
But fell short of the inventory build we anticipated our operations are taking actions to optimize throughput and reach our desired service levels.
Given present trends and momentum of our residential business should remain strong while commercial should slowly improve from its trough.
We will benefit from structural improvements on our cost and innovative new products that will enhance our mix most of our COVID-19 most of the COVID-19 restrictions around the world have not directly impacted the sales or installation of our products continued government subsidies and low interest rates should support economic recoveries.
New home construction and residential remodeling.
See increasing inflation in most of our product categories and are raising prices in response.
Assuming current conditions continue we anticipate our first quarter adjusted EPS to be between $2 69.
And $2 79 X.
Excluding the restructuring charges the.
The strength of our organization was demonstrated by our minutes of last year's historic decline in sales and a subsequent spike in demand, while protecting our employees and customers our strategies and initiatives remains flexible to adapt to changing economic conditions.
With improving sales and cash flow and a strong balance sheet, we are well positioned to take advantage on future opportunities.
We'll now be glad to take your questions.
As a reminder to ask a question you will need to press. The Star then the number one on your telephone keypad again, Thats star one to queue for a question management requests that you limit your questions to one primary and one follow up thank you.
And our first question is going to come from the line of Susan Mcclary with Goldman Sachs.
Thank you good morning, everyone and congratulations on a great quarter.
Thank you congratulations to Jim as well.
My first question is you know I'm I'm I appreciate the color that you gave us around you know how the business is coming together, but can you help us think through 2021, you know understanding that there's a lot of momentum as we come into the year, but how should we think about things as we get to the second half perhaps in the comparisons get a lot tougher.
Or just any color on that cadence as we move through the next couple of quarters.
Let's see if we can give you some more color on that.
The trends from the fourth quarter are continuing into the first quarter.
Residential remained strong and commercial continues at depressed levels as we go through the year, we anticipate the economy strengthening more and housing trends remaining positive.
At this point, we see the commercial coming off the trough, but we do not expect it to rebound to prior levels. This year.
Marshall margins to remind you are higher than our residential and has a significant impact on our flooring North America on global ceramic segments.
Our SG&A spending we expect to stay in line this year with the sales growth.
And full year margins should expand with improved cost and mix.
Production on productivity should be higher with less interruptions, absenteeism, improving and increased inventory and cost saving initiatives.
All of the businesses that we have have upside from last year, but it's not unlimited and we do not have the normal inventory as a cushion to help us as we go through the year.
A weaker dollar will also improve our foreign translated results and a tax rate should go back to normal at around 21%.
If you look at the first quarter.
It's going to be seasonally stronger than historical.
And it's going to have 5% more days in it.
As we said, we're raising prices, 3% to 8% and sometimes even more given the inflationary pressures that are going on.
In the period were also still managing absenteeism, that's at high rates in some places as well as some supply disruptions in various markets and products.
As we go into the second quarter.
It has low comps and you guys need to adjust.
Sales relative to the trend line rather than last year.
And then last year as we look at the third and fourth quarters.
It rebounded significantly which is making our comps more difficult for the second half.
As Covid gets under control, we'll have to see how spending on remodeling of homes changes if at all.
We on our customers during those second half periods of third and fourth quarter reduced.
Holiday time off that positively impacted revenues as well as margins for both periods.
We anticipate more normal conditions in the second half of this year.
Then we get to the fourth quarter again, it has a 6% fewer days this year than last year.
So that they will try to help you with some of the <unk>.
Quarterly trends.
Yeah, No that's very helpful. Jeff. Thank you and my next question is you mentioned that you are putting 3% to 8% pricing through across a lot of the business can you help us think about the timing of debt pricing benefit coming through and how that compares to when you'll start to see some of this inflationary pressure coming in.
We're trying to match them up on some of the increases were announced and implemented at the end of the fourth quarter. They are going in all different times through the first quarter and some could lag into the second quarter and the different channels in pieces.
We're trying to get them lined up we think we're going to be reasonably successful.
<unk>.
Raw material prices most of the costs.
Are increasing and we don't know if we've seen the end of it as well as the transportation changes as yet so we're going to have to stay flexible and keep adjusting with them as we go through with all of this we expect the annual margins to increase.
We're going to have to keep responding to it as it moves.
Right. Okay, Alright, that's very helpful. Thanks for the color and good luck. Thank you.
And our next question will come from the line of Mike Dahl with RBC capital markets.
Alright, thanks for taking my questions Jeff.
Really helpful.
I wanted to follow up on Susan's question around.
The price increases and more from kind of a net price mix standpoint.
Clearly.
There have been periods of time, where you've implemented price increases on a like for like.
Basis in recent quarters, but then we're still seeing kind of net negative price mix in some of the segments you articulated part of that around commercial but just wondering as you think about this year given the magnitude of price increases you are implementing how should we think about kind of debt overall.
<unk> net price mix bucket will it still be pressured more.
Mix or should we see it even more neutral this year.
The I guess going into the markets first with the increases.
It helps that the markets are tighter than they are normally and the inventories are lower across the whole marketplaces, so that should help us implement them better.
The price mix.
We're hoping to improve the price mix as we are.
Changed the product offering and improve it as well as the market gets better the remodeling part of the market as a stronger park.
It's typically higher value products. So the two conditions were hoping to get the price mix not having the same detriments with all of that this year.
So overall it should be positive, but again you have to look at the impact on inflation as well.
Right. Okay got it that's helpful and then.
I guess.
Ill follow up just around <unk>.
On the cost dynamics.
Queen.
On a temporary production benefit.
Running longer than normal.
Seasonally.
I was hoping you could kind of quantify if possible how much some of that actually benefited.
Half of 'twenty margins, and whether or not youre, saying margins.
You know what would then be down off those levels in the second half of 'twenty, one, which which it sounds like.
Could be could be the case and then the second part just on the cost side is really.
What do you see as most different this year compared to call. It 2018, when it proved to be much more difficult to offset some of the inflation that came your way.
Let me take the first part of that and then I'll, let Jeff respond to the second half.
So on the thank you have to go back to the fourth quarter.
As I said, the price mix being a drag of about $30 million, but you had strong strong rebound on productivity of about $71 million for the quarter in total.
And part of that would be driven by obviously, our restructuring initiatives, but as you also point out we are able to run our assets longer during the quarter, which is certainly going to help from the absorption and a margin standpoint.
I guess related to 18, Theres a lot of differences.
We went in and we.
We make decisions to invest in a lot of startup pieces in 17 and 18 and.
17, and 18, we had a lot of cost for those things were coming up some of them.
Most of those things are now operating well and are reaching the profitability that we want we mentioned several on the quartz countertop business.
In Russia.
Multiple other ones are all coming up to the L. B T. In Europe is in line with our the rest of our profitability and we are expecting it to catch up this year with the engineers, who are executing as we speak to change the problems in the United States at.
At the same time, we had some of our own internal on organizational problems. You know we changed the management in the organization of the flooring North America business at the same time.
And so those are all different this year and then we're more aggressively trying to push prices through the marketplace and we think it's helpful that our competitors have.
Our tight as well as having other limitations in their own business.
Got it okay. Thanks, Geoff Thanks, Tim and congrats Jim on your promotion.
Thank you.
And our next question is going to come from the line of Justin Speer with Zelman <unk> associates.
Good morning, guys. Thank you very much.
A couple of questions for me just in regards to the domestic nonresidential revenue headwind that you mentioned in the fourth quarter, maybe could you give us some context for magnitude of the decline there and how that compares for the third quarter.
Maybe what you're thinking for the first quarter in that channel.
The commercial business remains depressed and all the pieces, we have large pieces in and service industries like hospitality industry.
Retail and office sectors as well and then we also have a bigger airline business and so all of the sectors that are under pressure and they havent come out you have the new construction part of the business, which people stopped so theres going to be avoid in between between the new construction projects that are ending that's helped.
Some of our businesses is they've kept flowing through but the new ones that theres a void in between and we're having a hard time gauging, how theyre going to pick up on where they're going to come through and then just as one more part of our commercial business and the category. We're the last thing to go in so everything else has to be done before ours comes in and we filled a pickup so we're having.
A difficult time, seeing where it is going to come out.
The two businesses that we have where we have the most of the big parts of commercial are in our flooring North America carpet business, our <unk> business, our U S ceramic business and our European ceramic business is aware the largest pieces are the other businesses are much more heavier.
In our residential and don't have the same impact that they're having on those three.
And I guess following up on that.
A lot of questions on the cost basket, but maybe.
Maybe could you provide us some color or context in terms of how much your cost basket is up currently versus the prior year.
And then if you were to snap a line on.
On some of the commodity for moving now ultimately graduating into your P&L. What are you guys planning for the second half in terms of a year over year cost basket headwind that you're going to have to offset.
The costs are changing almost daily we won't have the roll up till the end of the quarter was actually happening.
The 3% to 8% is the result of the cost changes.
Those cost changes we may have to go up further depending on how they go we think we pass through what we see.
There are some supply interruptions, they haven't become dramatic yet, but there are some where the supply constraints are limiting some of it and causing the cost to go up more as we go through and I forgot the last part of your question.
I was just trying to get some context for how much the cost basket when we look at the raw inputs and transportation costs.
I know I know, it's hard to it's a moving target right now, but if there is any line of sight for the year over year change on that cost basket for the year or particularly on the back half of the year.
In 2021.
We don't have any idea that the prices are moving so much.
You have the oil prices that have gone up recently, we thought that we had a good handle on where they're going to go we don't know whether oil is going to end up at $60 or it for.
45 to 50 to tell you the truth is it and the same thing around the world and the different pieces.
So we're going to have to stay flexible and react to it because we don't know the answer.
Understood well, thank you very much I appreciate it.
And our next question is going to come from the line of Michael Rehaut with JP Morgan.
Thanks, Good morning, everyone.
Jim Congrats again on on the on the promotion and Frank.
I guess now twice, it's been great working with you.
Thank you Mike.
Looking at the margins in the back half for the year of 'twenty.
Certainly fourth quarter benefitted more than expected from the stronger sales and less time off.
As we look into the first quarter and the second quarter.
You certainly hoping for price increases to catch up to some of your commodity inflation youre still looking for strong if not stronger.
Year over year growth.
Particularly against easier comps.
And hopefully some of the manufacturing efficiencies are reduced and <unk>.
Maybe commercially bill comes back a little bit we'll see but it's.
Certainly probably wouldn't get worse from here so.
Are we to think.
I think that you can hold on to these types of low double digit consolidated operating margins or are there some adjustments we need for me.
Based on again, either time off certainly your plans from still be running at pretty high levels. So just trying to understand if you look at that 11, 5% consolidated margin.
It seems like there's still a lot of tailwind in front of you.
If that margin can be sustained if not even built upon.
On the front half of 'twenty one.
I'll start out with the margins for the full year, we're expecting to be above last year and keep improving.
When you get into the second half of the year.
Last year was really unusual because.
Because of Covid people took time off so when we got to the normal holiday season like in Europe.
We've ran mostly straight through it at the same time, our customers were still buying products and doing thing. The question is going to be how strong is the business. This year.
What are people going to how is it going to change the way people Act and to tell you. The truth, we have a big question Mark.
On our peace, we don't know.
We're assuming that the third quarter will be.
More difficult with the comps because we're assuming we'll get back to closer vacation schedules and timing.
On the part with the economy.
Economy could expand enough, where the business keeps going stronger and actually are.
It was better than we think we're having a hard time estimating what's going to happen between the economy growth.
On Covid stopping.
And if you know but.
Yes, I am sorry, Jeff, but I just wanted to make sure.
I don't mean to interrupt, but I'm really not as much focused on the back half I agree with you that there is a lot of variables and there are some headwinds, but I'm more interested in in the front half of 'twenty. One if you think about those margins versus the back half of 'twenty.
I'm not used to comparing the two.
It.
The.
Fourth quarter trends.
Are going to continue the trends on our fourth quarter continued the demand is still coming in strong.
Dan.
Commercial we hope is going to slowly improve.
If you look at the fourth quarter for now, but you have to remember first quarter is always different.
We have more sampling of new products that go on we have introducing of things. We have shows going on we have costs that don't happen all across the world and so the cost structure of the first quarter is different as well as the <unk>.
Rest of the business, which is why it typically.
The margins drop and the sales are lower the difference. This time is the sales are stronger than a historical time.
Also have the winter time and the thing is.
How it impacts shopping and not in different markets in places so.
You have to it'll be stronger than normally historical.
But.
Uh huh.
You cannot you can't forget all the normal seasonal things that happen and then also in Q1 comparability Q1.
Last year.
Towards the.
In the end of February we started to be impacted in Europe and then.
At the end of March we obviously are impacted and most of our businesses. So for.
For the comparability is difficult as well.
So I would say debt, we will see we're still trying to get our inventories up to where they need to be so we will see for.
Production running at higher levels.
Alright, Okay. Thank you one last quick one.
Capex I think you said that DNA in 2021, 590, <unk> have any outlook for capex for the for the year and perhaps even in 'twenty two would be helpful.
For 2021.
The capital spending is.
Targeted to be in line with debt DNA, so capital spending around that $590 million Mark.
<unk> focused on adding some capacity as we've talked about in laminate and Brazil ceramic and looking at our courts as well, making investments for new products and there are many cost savings projects as well.
In that in that number also converting leases two owned assets as part of that.
Thank you.
And our next question is going to come from the line of Matthew Bouley with Barclays.
Good morning, Thanks for taking the questions and my congratulations to both for.
And Jim as well.
I wanted to ask about the $100 million to $110 million of cost savings you said you've achieved about 50, so far.
So you also said some of the savings will flow through inventory in future periods. I just wanted to tie all that together is that to suggest that's really the first half of 'twenty, one where we see the incremental $50 million for the most part or does some of that spill kind of phase in is incremental savings in the second half of the year. Thank you.
To be clear the $50 million has been already in our P&L. So that's the year to date benefit we saw in 2020 of the 100 $110 million.
So.
So that we believe will flow through in.
Through 2021 remember we had previously noted that we shouldn't get $15 million to $25 million a quarter, so that benefits should be somewhat front loaded.
2021, our cost of margins are reflecting the benefits of our actions and again, we will complete that as we go through the year.
Got it okay. Thanks for that Jim.
Second one I guess on the same topic.
You talked a little bit about kind of rethinking some of the cost reductions I don't want to put words into your mouth, but if any of the cost reductions actually.
Been shelved in light of this recovery in demand or actually is there even any opportunity to be more aggressive in certain places with rationalization just any assets that were more geared towards the commercial business. For example, thank you.
If you remember in last quarter, we actually reduced it last quarter and announced we were reducing it other than that we have a few projects, where we're watching but we havent concluded fully well have to see how the market goes in and determine what to do but we're staying with the same numbers at this point.
Okay. Thanks, everyone.
And our next question is going to come from the line of Keith Hughes with truest.
Thank you for the questions on the LPT and in Europe.
Growth there has lagged behind the U S. Net terms of share gain and that started to now accelerate and then also on your facility. I think you said you're running at seven days, a week or you're kind of hitting an optimum level on that facility in terms of its productivity and costs.
So in Europe, the European market is significantly smaller for Lv teeth in the United States I think it's somewhere in the realm of about half the size of it.
It's growing but at a smaller rate and it's not being accepted at the same level.
Our business is increasing substantially in Europe.
Our operations.
Ah running reasonably well and.
We still think there are significant improvements to make in mix product innovation and efficiencies as we go through the year to enhance the margins further.
We're expecting the productivity to allow us to continue to satisfy high increases and we have probably five or six engineers over in the United States today transferring all the knowledge that they have been doing to get us up to theirs.
With that we're also putting through price increases to cover both significant material changes as well as transportation cost rising.
And then just as a comment.
Ocean freight from Asia is up dramatically.
Is it affecting all the costs.
As the U S LPG production.
Helpful.
Six months.
So on the Colorado.
It's probably at least six months to get it it's probably more than six months because what happens is.
Some of it takes equipment modifications and equipment modifications and some of them take four to five months to make and we didn't want to put him in here until they were proven on the other hand, there is a lot of immediate things that are going on now speak.
Speeds are going up quality.
The.
Cost of the materials and pieces are getting better so we're going to see improvements significantly as we go through the year, but it will probably be six to nine months before we get up to their level.
Okay. Thank you.
And our next question is going to come from the line of Stephen Kim with Evercore ISI.
Yes, thanks, very much guys congratulations too to all.
On a couple of questions.
Related to your opening remarks, Jeff you talked about I believe you were seeing some substitution of Lv T product with laminate on the back of your innovation that you've introduced in that category. I was wondering if you could elaborate on this a little bit more.
Seem to be a pretty positive trend for you given your dominance in laminate.
And then secondarily I'm wondering if a shift to laminate, let's say that actually gains momentum.
It would affect possibly your desire or interest in it.
We're not to add additional <unk> production sometime I know you just talked about six to nine months, but what would it take for you to add additional lines to your existing or to the rigid <unk> production you are ramping up now.
Let's see the first question is about laminate so laminate.
Historically, the laminate market was considered a low end market. Most of it was sold through the home centers and we had a premium position with differentiated products and performance features.
What's happened is that the premium part of the market that we're in we have made it as an alternative that is seen as a good alternative to both wood and Lv T.
And so the market is growing at the same time the market has expanded into other channels because of it. It's now being used in new construction, that's being accepted as an alternative to wood, it's being used in the retail remodeling business at a much higher level.
And it's still doing well and growing in the.
Home Center channel. So all the parts are coming together and the same thing is happening in the European business with our unique position in the marketplace with that.
We have a new line coming in.
That'll be operating the end of this year.
Add about another $125 million of capacity to the U S market, we are importing product from.
Our operations around the world the supplement it until that comes in as we go through so that was that's the business is doing well and we're expanding it.
Further <unk> business continues to do well.
We are expanding our capacities by operating the plants well and then at the same time, we are looking at various plans how to grow further long term.
Okay. So I'll take it so you're still looking into adding potential capacity there at some point.
Great second question relates to incremental margins I know that a lot's changed in the business over the last few years, we had at one point in the past look.
Looked at incremental margins.
I think Frank you had talked about incremental margins I'm curious if there was any update to what we should be thinking about incremental margins across the various segments.
And for instance, when we look at <unk>, having you know a number of extra days and we think about the extra sales that will come with that would it be reasonable to apply those same incremental margins to that improvement in sales and volume.
Well answering your first question on incremental margins I mean, we've got so many.
Moving parts right now Steve with.
Higher volume production shorter runs.
Increasing raw materials and lagging cost are for.
Reising, it's going to be hard to come up with anything thats meaningful.
I think at this point in time and kind of on.
Jim do you want to address the second half for questions.
Yes.
You're going to repeat the rest of your question was asking about effectively yeah, effectively a volume only kind of incremental so on the case of extra days or something right. You. Your large it's largely a volume issue for those extra days and so like what kind of Incrementals you get like when you.
On just volume for getting the price mix and all that stuff.
As you could probably use what we've done what we've given you historically Steve on that.
Yeah, that's kind of a range of 20 to 30 years I remember it.
Depending on what day.
Remember with Frank pointed out it's a little bit on an unusual situation because your actual cost is even extra days. Your actual cost is running higher with the shorter runs.
The absenteeism.
<unk> sure that Jeff pointed out so just.
Just be aware of that as you think about it.
Okay.
Yeah that makes sense, okay. Thank you for that.
And our next question is going to come from the line of Sam <unk> with Raymond James.
Good morning, Jeff, Jim and Chris I'll reiterate the congratulations to both Frank and Jim on the.
On the day announcements well earned on both of your respects.
Most of my questions have been asked and answered just a couple of housekeeping items.
I think guiding essentially for that similar $25 million a quarter.
Savings from restructuring in early 'twenty, one as you saw in late 'twenty, but I'm wondering why that doesn't ramp because of the FIFO inventory accounting as you finally cycle through your high cost inventory can you help just.
Help us understand or help me understand why debt restructuring savings wouldn't ramp from from back half.
So what youre going to see Sam is that once you reach kind of the anniversary date of the actions that taken place you kind of lap those.
Those costs and the lower cost will now be part of your operations. So we announced it in Q2.
Now some of the actions will take longer in terms of the plant consolidations as such through the year, but that's why I'm, saying that the largest part of the remaining savings should come in the first half of the year as we anniversary the actions we took in 2020.
But so 50, you got $50 million on savings in the back half on you're essentially guiding for 50 to 60 on the front half so.
Or would the ramp day that you're referring to.
It did it did ramp so it ramp from Q2 to three to four and then.
Q1, two should be about the same pace as Q4, which is a full I think theres. Subsequently he is talking about an additional 50 to get to the 110 at the same 50, yes.
Correct.
Okay that'll take place over the next 50, not the same 50.
Okay.
Then my final question, if I could.
In the first quarter guide.
Do you have significant benefit from the inventory rebuild baked.
Baked in to the guide from the fixed cost absorption or does that rebuild occur.
More ratably across the global over the course of the year I guess once once some of the COVID-19 constraints alleviate.
As in the first quarter numbers, but the build we're talking about is going to go throughout the year, it's not all going to happen in the first quarter.
Okay. Thank you have a terrific weekend gentlemen.
Thank you.
Thank you and that will conclude our Q&A portion on today's conference call I'm now going to turn the conference over to Mr. Lorber Baum for closing comments.
Thank you for joining us today.
The industries in a good position.
It appears the category should do well and we think we're well positioned to take advantage of it. We appreciate your taking time and joining us have a good day.
Once again, we'd like to thank you for participating in today's market Mohawk Industries Conference call you may now disconnect.
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